Make Do With the Good and Bad

The summer/fall of 2005 will be remembered for the indelible mark hurricanes Katrina and Rita left on the Gulf Coast. Natural disasters typically have a negative impact on the economy in the short term because of job losses and disruptions to business income, not to mention a host of other factors. Yet the aftermath of hurricanes in particular often stimulate the local economies affected through spending to rebuild infrastructure, homes, and businesses, because the destruction comes from both wind damage and flooding.

With so many communities wiped out by this recent flooding, the demand for new home construction will surely rise. Damaged homes still standing will need new roofs, furniture, and appliances. Congress has already approved financial aid worth $60 billion, with more money promised. What companies will benefit from the reconstruction money? Read on, Fool, to see which ones you should be taking a closer look at.

Stock

Price

Forward P/E

52-Week
Price Change

Forward EPS
Growth Rate

Wal-Mart

48.20

16

-15%

14%

Target

56.56

18

11%

15%

Home Depot

40.81

14

-4%

14%

Lowe's

60.33

16

2%

17%

Beacon

27.70

20

54%

18%

Caterpillar

54.10

11

23%

11%

Cummins

88.35

7

19%

22%

*Data from Yahoo! Finance. Prices and P/E data as of market close 11/9.

Before and after the storm
Retailers like Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) were busy prior to the hurricanes, as customers in storm-prone areas stocked up on supplies like bottled water, canned food, and flashlight batteries. Then came the shutting down of 126 Wal-Mart stores in the Gulf Coast area. The world's largest retailer demonstrated efficiency by reopening many of the stores within days of the storm's passing.

Now the returning residents will need not only food and water, but mops, tarps, and cleaning supplies. Will all the added sales boost earnings 10%? Likely nothing close to that, but that's not what I'm saying. The high-level takeaway is simple: The closure of the stores due to the storms didn't hurt both companies' overall sales figures to a significant degree. Both Target and Wal-Mart have said so. Residents returning will need to buy all the day-to-day supplies that were lost, which might nudge earnings above current expectations.

Let's take a look under the hood. Wal-Mart's most recent figures show a 10.5% increase in company-wide sales for the month of October, on the backs of a 2.9% increase in U.S. same-store sales. For the 39-week period ended Oct. 28, sales increased 10.2% and same-store sales have increased 3.8% -- the makings of a solid performance by any standards.

Wal-Mart has cautioned that high gas prices would curb consumer spending and also raise its transportation costs. Investor worries about the slowdown in consumer spending have driven the stock down 15% over the past year. However, the world's largest retailer is well-positioned to deliver a solid 14% earnings growth for next year, and the upcoming fourth quarter is typically the best time for the discount giant.

Meanwhile, rival Target is giving the big W a run for its money. The Minneapolis-based discount retailer expects a 4% to 6% rise in sales at stores open at least one year. Hurricanes Katrina and Rita had a negligible impact on the company's business. Target is still on target -- pardon the pun -- for 15% earnings growth over the next several years.

Rebuilding lost homes
Nearly 80% of the homes not leveled by the storms in the affected areas will need substantial repairs. Residents will flock to home-improvement stores Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) for plywood, drywall, and generators. If you're thinking like me, I see these companies having plenty of business in the months and years to come -- not to mention the fact that things weren't looking too bad prior to the hurricanes hitting.

Home Depot -- the second-largest home-improvement retailer -- is down substantially from the lofty levels in early 2000, but it has started a healthy comeback over the past couple of years. The stock has doubled and doesn't show signs of abating, and the company expects 2005 earnings to be 14% higher than last year at the low end of guidance. Not to be left behind, Lowe's said this past week that it expects earnings to rise 22% in 2005, while sales are expected to jump approximately 17%.

The North Carolina-based retailer has grown faster than Home Depot in the recent past, largely due to Home Depot's already expansive presence. In this Fool's opinion, Home Depot is a better value with more room to run. It has a lower P/E than Lowe's, the two are comparable from a PEG perspective, and some might argue growth expectations from a FCF perspective for Home Depot (based upon recent history and Home Depot's relatively slower rate of expansion).

After a series of destructive storms hit Florida last year, the demand for roof repairs skyrocketed. One company that benefited from the need for thousands of damaged or collapsed roofs was Beacon Roofing Supply (Nasdaq: BECN  ) . So far, it seems to be the same deal this year in Mississippi, Louisiana, and Texas. Beacon is a new kid on the stock market. Formed in 1997, the roofing supply company went public at $13 in late Sept. of 2004, and annual sales of $650 million are likely to increase more than for any company as demand for roofing materials increases along the Gulf Coast.

The added business due to repairs and reconstruction isn't what I'd call a short-term event. You needn't look too far for a case in point: The recovery efforts in hardest-hit areas continue from a storm that struck Florida in 2004.

The current devastation along the Gulf is unimaginably far-reaching and total -- I'm inclined to believe this won't be a shot in the arm for a quarter or two, but likely for years to come. And in my opinion, this isn't the sole reason to own the stock -- growth areas outside the Gulf Coast are fundamental to the company's long-term success. Earnings are expected to grow a healthy 18% moving forward.

Growth has come from the strong growth in new home construction, especially along the East Coast, and through key acquisitions of smaller companies in states where Beacon did not previously have a presence. Beacon owns nine regional companies in the U.S., including Shelter Distribution, which operates two locations in the greater New Orleans area. Sure, this isn't likely to persist on a longer-term basis, but I believe the company's growth potential reflects this prospect.

Factor in a forward P/E of about 20, and things don't look so bad. Also bear in mind that growth estimates clocked in before any hurricane hit, so it likely doesn't include the added business. Now, the difficulty, though, is that I believe substantial potential exists in this realm -- the combined effect of the aforementioned events and prospective cooling to housing activity will affect the bottom line. The question is how much and where, relative to expectations.

Cleaning up the debris
The first step to recovery is to remove all the tons of debris and fallen trees left by the storms. That's a huge task. Big trucks with big engines are needed to haul the refuse out of the cities and towns. Caterpillar (NYSE: CAT  ) and diesel engine maker Cummins (NYSE: CMI  ) are two companies in for the job. There's plenty of business for Caterpillar with many square miles of land to clear. Though, here again, I'd be hard-pressed to make any sort of determination as to how many cents these events will add to future earnings.

Keep in mind, both machinery companies are cyclical stocks, which means earnings tend to rise quickly when the economy turns up and fall quickly when the economy turns down. Owning these economically-sensitive stocks does come with risks. For example, higher costs of fuel and prices for steel could pressure earnings in future quarters. But let's be Foolish and take a closer look at these two stocks to see what they've done for shareholders over the longer term.

For those Fools looking for more evidence of continued earnings growth, Cummins reaffirmed its full-year 2005 earnings forecast, citing an improved cost structure and more diversified products. The company also announced a stock buyback worth $100 million and has paid down over $250 million in debt this fiscal year. Cummins is trading at a forward P/E of 9, and on account of that, I hardly see the stock as overvalued, particularly given its growth expectations moving forward.

Meanwhile, Caterpillar is increasing production to meet strong demand from the mining sector. And for those looking to hedge uncertainty, take solace in knowing the company has increased its quarterly dividend for each of the past 10 years to a sizable, though not exactly meaty, 2% yield.

Recovering for the future
The bottom line for these companies is not necessarily one of capitalizing on the opportunity afforded by these horrible events that have come to pass, but rather one of assessing the opportunity afforded prior to them.

I'm by no means advocating making a habit of investing after extraordinarily horrific events of this sort, but I am recommending you look into some otherwise attractive investments, which have become slightly more attractive as a result of such unfortunate events.

For more Foolish investment ideas, check out

Home Depot is aMotley Fool Inside Valuepick. For a 30-day free trial, click here.

Fool contributorKelvin Taylordoes not own shares of any of the companies mentioned.


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