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Home Improvement Is Finally Bouncing Back

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A turnaround is afoot at Trex (Nasdaq: TREX  ) .

You wouldn't know it judging by the way shares of the leading maker of wood-alternative decking opened 4% lower yesterday. Disappointing financials for its holiday quarter initially dashed hopes like an outdoor patio pieced together over a sinkhole.

Net sales declined a brutal 32% to $51.5 million. Trex's net loss -- before a beefy accounting hit on warranty reserves -- of $0.54 a share contrasts sharply with an adjusted profit of $0.23 a share a year earlier.

Trex's net sales decline and deficit were deeper than analysts were expecting, and that's before we touch on the quality issues that one would normally associate with having to fortify reserves covering warranty claims.

Trex may look pretty bad, so why did the stock actually close slightly higher after yesterday's initial dip?

"We expect 2012 to be a successful year," CEO Ronald Kaplan is quoted as saying in yesterday's press release -- and it's easy to see why. Trex is ramping up its production to meet the demand that should deliver a 30% surge in net sales this quarter. The $90 million that Trex is targeting is comfortably ahead of the $86 million that the pros were forecasting.

Lumber Liquidators (NYSE: LL  ) experienced a similar initial letdown after posting its results last week. Investors were disappointed to find the country's leading hardwood retailing specialist earning slightly less than analysts were expecting. Sales and comps rose during the quarter, but the chain's guidance calling for a profit per share of $1.05 to $1.20 on $710 million to $740 million in net sales was below where the pros were perched.

However, an opportunistic Piper Jaffray analyst upgrade helped reverse the situation the following day.

It's not the end of the world to find that Lumber Liquidators isn't growing as quickly as the pros were expecting. When guidance calls for a 4% to 9% increase in net sales -- and a 13% to 29% spike in profitability -- we're seeing a more encouraging trend for home improvement in general.

Nobody wanted to embark on Trex decking projects or upgrade their flooring through Lumber Liquidators last year. Why spruce up a home that the bank may take away through foreclosure? However, now that the economy is showing signs of life and home prices are stabilizing, it's time to get excited about the companies that will benefit as pent-up home improvement projects finally get going again.

Lowe's (NYSE: LOW  ) and Home Depot (NYSE: HD  ) have posted better-than-expected bottom-line results earlier this month. However, analysts see the home improvement superstores growing at a much slower pace than Trex and Lumber Liquidators.

Lowe's and Home Depot are naturally the safer bets on a recovery in home improvement spending, but the real growth is waiting at Trex and Lumber Liquidators.

Hitting the register
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The Motley Fool owns shares of Lumber Liquidators Holdings. Motley Fool newsletter services have recommended buying shares of The Home Depot, Lowe's, and Lumber Liquidators Holdings. Motley Fool newsletter services have recommended writing covered calls in Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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Related Tickers

10/26/2016 3:38 PM
LL $18.43 Down -0.05 -0.27%
Lumber Liquidators CAPS Rating: ***
HD $122.89 Down -0.45 -0.36%
Home Depot CAPS Rating: ****
LOW $67.41 Down -1.06 -1.55%
Lowe's CAPS Rating: ****