With the U.S seemingly shrugging off the "anything but housing" mindset that inevitably kicked in after the great financial crisis over a decade ago and housing starts now back in growth mode, it's time to look at some companies that can benefit from a housing boom. I think plumbing and architectural products company Masco (NYSE:MAS), DIY toolmaker Stanley Black & Decker (NYSE:SWK), and windows and door manufacturer JELD-WEN (NYSE:JELD) fit the bill. Here's why.
Masco generates 81% of its sales in North America, so it's safe to say it's a play on the U.S. housing market. Masco operates out of two business segments, with plumbing products generating 67% of sales from North America and decorative architectural products only selling to North America. Both segments are heavily exposed to the repair and remodel market (83% of sales for the plumbing products segment and 96% for decorative architectural products).
That said, the reality is that a booming housing market is synonymous with rising house prices and good housing sales. These metrics are key drivers of the repair and remodel market. Consumers feel the wealth effect from rising house prices, and homes get remodeled in anticipation of a sale or after a purchase. On the latest earnings call, CEO Keith Allman said: "Home price appreciation was up nearly 30% in December and existing home sales were up over 22% compared to the prior year. Each of these metrics has a strong correlation with our sales on a lag basis."
Allman forecasts that Masco's revenue will grow 2% to 6% organically in 2021 with a 3% contribution from acquisitions and 2% from favorable foreign exchange movement leading to total revenue growth of 7% to 11%. Earnings per share is forecast to be in the range of $3.25 to $3.45, representing a growth of 4.2% to 10.6%. That would be an excellent result in a year when Masco will lap the surge in home improvement spending that occurred in the second half of 2020 due to the pandemic.
Trading on less than 20 times current free cash flow and with management expecting long-term organic revenue growth of 3% to 5% (plus 1% to 3% from acquisitions) and 10% growth in EPS, Masco looks to be a very good value if you think the U.S. is about to embark on a multi-year expansion the housing market.
Unlike most of the housing materials stocks, JELD-WEN sells more to the new residential construction market (47% of sales) than it does to the repair and remodel market (42% of sales). The remaining 11% of sales go to the non-residential construction market.
Slightly more than two-thirds of sales come from doors, with windows contributing 20% and ancillary products the remaining 13%. JELD is the leading player in North America's residential doors and the fifth-largest in residential windows. It's also No. 1 in both residential and non-residential doors in Europe. Overall, North America contributes almost 60% of its earnings. As such, U.S. new residential construction is probably the most crucial swing factor in its profits.
Management expects 4% to 7% revenue growth in 2021 with earnings before interest, taxation, depreciation, and amortization (EBITDA) rising 7.5% to 16.5% to between $480 million and $520 million.
Management believes a combination of consolidating its sites and modernizing production will lead to significant cost savings and an EBITDA margin of more than 15% over the long term compared to 10.5% in 2020. As such, JELD is as much a turnaround play as it is a company to invest in to get exposure from increasing U.S. housing starts.
Stanley Black & Decker
Finally, Stanley Black & Decker has potential upside from an extended period of strength in the U.S. housing market. The first port of call for housing-focused investors is Stanley's tools and storage business (71% of revenue). Around 63% of the segment's income comes from the U.S., and approximately 61% of total company revenue comes from the U.S.
A more robust U.S. housing market would boost the tools segment's power and hand tools sales, construction and DIY sales, and the Craftsman DIY brand.
However, Stanley also has upside potential from its investment in lawn and garden products company MTD. Management plans to exercise the option to buy the remaining 80% of the company Stanley doesn't currently own. Stanley CEO Jim Loree said the company is "working on a multi-year roadmap to achieve 15% operating margin in the category."
For reference, MTD had an operating margin of 6% in 2020 on sales of $2.6 billion compared to Stanley's sales of $14.5 billion. A growing housing market probably means a stronger lawn and garden products market, and that would suit Stanley's growth aspirations just fine.