Making any bold predictions in the housing market based upon what you see out of home improvement and building materials retailers like Lowe’s (LOW) and Home Depot (HD) is not quite a scenario of the tail wagging the dog. It is a very important piece of the puzzle, and one that is becoming a much clearer piece of the puzzle.
Evaluating the housing market using Lowe’s and Home Depot earnings as a barometer really applies to the resale market and the home-improvement side of housing. While there is some sign of life in the housing construction market for new dwellings, it’s not much to get excited about. It’s a bit like calling a stable coma patient a fully recovering patient.
Still, even after reporting a 30% drop in profits and a 3% drop in revenues from the same period a year ago, Lowe’s did not see a selloff in its stock today.
It’s true that customers and the retail public are still delaying any decisions on large purchases. It’s also true that the recession is only being helped because the comparison periods were so bad, and because of stimulus money, so it is of little surprise that these numbers were not rock solid, especially when you consider there is still over 10% unemployment, declining house prices, and a very price-sensitive consumer,
But the interesting aspect here is that in reporting earnings, Lowe’s CEO Robert Niblock gave some sign of life in the broader picture. He noted that he anticipates that housing will start recovering by the middle of 2010. More specifically, Lowe’s said that it has even seen some improvements in some of the worst regions of California, much of the Southwest, and even in Florida. Add in the extension of the housing tax credits and an economy that is starting to stabilize, and at least the area around the existing home sales and home improvements will start to do better, even if few new homes get built.
The notion that housing is still only recovering in the $250,000 and under category is a wild card. Having a home in the $300,000 to $600,000 category right now is still the financial no-man’s land, and that is generally the housing level of the upper-middle class. These are the kinds of customers that hardware and home improvement stores see ones who can significantly bump up their ‘per customer spending rates.’
Wall Street and Main Street are both being patient when you consider the movement in Lowe’s stock price. Lowes’ shares are down about 2% since July 31. If you use June 30 as the date, the stock is up about 13%. From the March 9 low, Lowe’s is up over 60%. For all of 2009, Lowe’s is up a mere 3.3%. At the current estimates, Lowe’s trades at about 18-times 2009 (Jan-2010) earnings expectations and over 16-times 2010 (Jan-2011) earnings expectations. It is very hard to call Lowe’s a bargain at these levels. Interestingly, it is very close to the same levels of Home Depot. Lowe’s might be down more if this was not a market dominated by bulls.
The more interesting notion is if you go one step up the food chain beyond a Lowe’s or than a Home Depot. What does this almost-merger-of-equals between Stanley Works (SWK) and Black & Decker (BDK) tell you about the stance of home building and home improvements on the side of suppliers? Those two companies discussed a long, slow return of their end markets as well, rather than a sudden return to normalcy.
These companies all tied around the physical aspects of housing and home improvements are all telling you of a return to an environment tied to some normalcy. Unfortunately, this is the ‘new normal’ and the valuations here leave little room for any misses in the future. Those values definitely do not work if there is a double dip recession a year from now.
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