If you believe interest rates are headed lower in 2024, then it's highly likely you think conditions in the U.S. housing market will improve. After all, housing affordability is highly sensitive to movements in interest rates and, therefore, monthly mortgage repayment rates.
Looking at some housing-related stocks, including Owens Corning (OC 2.10%) and Whirlpool (WHR -0.39%), makes sense. They trade on favorable valuations, provided you believe the housing market will recover in 2024.
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Owens Corning: A great value housing stock for 2024
Trading at just under 11 times Wall Street estimates for 2024 earnings, the insulation, roofing, and composites business looks like a good value, mainly if you think there's upside potential coming from an improvement in the housing market.
The company generates 59% of its revenue from residential construction materials, 25% from commercial construction, and the rest from the industrial sector. About 70% of its revenue comes from the U.S., so it's very much a play on conditions in the U.S. housing market.
Management believes it has a growth opportunity in insulation ($3.7 billion in revenue in 2022) because 90% of U.S. buildings and 75% in the European Union are under-insulated.
Its roofing materials business ($3.7 billion) is primarily a repair and remodeling business (around 54% of segment revenue). However, it also has exposure to new construction (18%) and variable revenue from major storms and weather events (28%). The latter is weather-dependent and can vary significantly from year to year.
New construction revenue will improve with new housing starts, and the repair and remodeling market will improve with better sentiment around housing. Homeowners tend to spend on improvements in a buoyant sales market as they ready their properties for sale.
Its composites segment ($2.7 billion) has the most minor exposure to the residential market. However, it's still attractively positioned in construction (where its lightweight composites help with sustainability), renewable energy (wind power), and infrastructure.
Owens Corning has a good track record of expanding margins, and a recovery in the housing market (probably in the back half of the year) should lead to sales growth again, which will drop to the bottom line.
OC Gross Profit Margin data by YCharts. TTM = trailing 12 months.
Whirlpool: A high-yield stock to buy for 2024
Currently yielding 5.8% and trading on less than 8 times analysts' estimates for 2024 earnings, Whirlpool is a stock that is out of favor with the market. That much is clear, and its full-year 2023 earnings and cash flow are set to fall below the initial expectations at the start of 2023.
Initially, management expected $19.4 billion in revenue with an earnings before interest and taxes (EBIT) margin of 7.5%, resulting in ongoing earnings per share (EPS) in the $16-$18 range and free cash flow (FCF) of $800 million. However, the updated guidance calls for an ongoing EBIT margin of 6.25% to 6.5%, EPS of $16, and FCF of just $500 million.
Margins have been negatively impacted by promotional activity, and there's no guarantee there won't be margin erosion in the near future, too, as end-market conditions remain challenging.
That said, some perspective is needed. For example, the $16 in EPS would put Whirpool at just 7.6 times 2023 earnings, and $500 million in FCF would put it at 13.4 times FCF. Moreover, $500 million in FCF easily covers the $385 million currently paid out in dividends.
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In addition, management is cutting annual costs by more than $800 million in 2023. During the last earnings call, when discussing the potential for the cost-cutting actions to turn into 2024, CFO James Peters said, "We do believe there'll be a good amount of carryover in the range of 25% as we head into next year."
Whirlpool is also on track to shift its European, Middle Eastern, and African businesses (having struggled to generate meaningful margins) into a new company with Arcelik's European home appliance business. Whirlpool will retain 25% of the new company.
With cost-cutting and restructuring actions in place, Whirlpool is preparing to stabilize its business through 2024 and could exit the year with much better sales and earnings momentum.
