The Best Way to Play the Housing Rebound

As one of the largest manufacturers of home appliances in the U.S., Whirlpool (NYSE: WHR  ) is highly correlated to the housing market. Its broad portfolio covers laundry appliances, refrigerators and freezers, and cooking appliances. Key brands include Whirlpool, Maytag, and KitchenAid.

Shares of Whirlpool have outpaced the S&P 500 by more than 100 percentage points during the last five years. On top of that its dividend yield is only 2%, but its buyback program is robust. Last month it announced a $500 million buyback program--this is slightly more than 4% of its shares outstanding.

Toward the end of April, Whirlpool posted earnings of $2.20 a share--that's nearly 12% above what the company posted in the same quarter last year. But its earnings per share came in 5% below consensus. The company reaffirmed its outlook for fiscal 2014 EPS of $12 to $12.50. Wall Street's consensus estimate is for 2014 EPS to come in at $12.35, which would be 23% growth from 2013. That's pretty impressive, considering 2013 was a record year of earnings for the company.

A strengthening domestic market and international expansion drive growth
More than 65% of the company's operating income comes from North America, but it's looking to change that. Its focus is currently on Latin America and Asia. And when Europe starts to rebound from its longtime recession, it'll be a big positive for Whirlpool, since about 10% of its revenue is derived from Europe.

It's also revamping the manufacturing process by repositioning its manufacturing plants to locations closer to vendors and sales outlets. At year-end 2013 it relocated its commercial front-load washing machine manufacturing plant from Mexico to Ohio. That's a big positive considering more than 90% of its commercial front-load washing machines are sold in the U.S.

Also on the homefront, the demand in the U.S. is increasing thanks to an improving economy. The company is also seeing the benefits of young adults moving out of their parents' houses.

Other ways to play the housing market
Bed Bath & Beyond (NASDAQ: BBBY  ) is another very attractive stock that's leveraged to the housing market. It is currently down more than 23% year to date because last month Bed Bath & Beyond posted earnings of $1.60 a share. That was in line with consensus but still 5% below earnings in the same period last year. What's more is that comparable-store sales were up only 1.7% compared to growth of 2.5% in the same quarter last year.

The biggest opportunity is for Bed Bath & Beyond to catch up to the "big boys" when it comes to store count. Bed Bath & Beyond is expected to add 30 stores in fiscal 2015 (it currently has slightly more than 1,000 stores). That's still well below the 4,700 stores that Wal-Mart has in the U.S. The company believes the domestic market can handle 1,300 stores. There's also the opportunity to expand into Canada, where it still has fewer than 40 stores.

Another notable play on the housing market is Williams-Sonoma (NYSE: WSM  ) . Williams-Sonoma was the most affected of the three stocks listed here. Shoppers were trading down from Williams-Sonoma's high-end brand during the weak housing market, which is why shares traded below $5 per share back in 2008.

Williams-Sonoma is less focused on store growth and more focused on direct to consumer. It has been increasing its investment in e-commerce over the years. Its direct-to-consumer business is expected to account for more than 50% of total sales by fiscal 2016. The web already accounts for more than 45% of total sales. The key for getting web sales up is the international markets. Last year, it started operating full-scale websites abroad. It'll continue this expansion this year, with an initial focus on English-speaking countries.

How shares stack up
Whirlpool trades at a P/E ratio of 10.3 based on next year's earnings estimates--that's the lowest P/E of the three stocks mentioned here. Factoring in analysts' growth expectations, its P/E-to-growth (PEG) ratio is 0.6. Williams-Sonoma's forward P/E is 17, but its PEG ratio is 1.5. Williams-Sonoma has a dividend yield that's similar to Whirlpool, coming in at 2.1%. Bed Bath & Beyond also has a relatively low forward P/E ratio of 11.2. Its PEG ratio still far surpasses Whirlpool's at 1.3. But it doesn't pay a dividend.

Bottom line
The housing rebound is slowing, but the three stocks above still have a few growth opportunities. Whirlpool is turning to international expansion, Bed Bath & Beyond is growing its store count, and Williams-Sonoma is focusing on e-commerce. However, Whirlpool is the cheapest of the three and a solid growth-at-a-reasonable-price opportunity. For investors looking to play the remaining rebound in the housing market while also gaining exposure to the fast-growing emerging markets, Whirlpool is worth a closer look.

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