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Caesarstone, Home Depot, and Trex: 3 Housing Companies for Your Watchlist

By William Bias - Mar 8, 2014 at 8:00AM

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Check out these three housing recovery plays.

Over the past couple of years the housing market has been robust, with the Case-Shiller Home Price Index up 22%. Investors therefore may want to look toward companies that sell materials that go into building and repairing a home. Quartz countertop manufacturer Caesarstone ( CSTE -3.94% ), home improvement retailer Home Depot ( HD -0.05% ), and decking and railing products manufacturer Trex ( TREX 0.87% ) are a few companies that could benefit from this new housing boom. Let's look under the hood at their financials.

Quality countertops
Caesarstone understands that people want high-quality quartz countertops for their new homes, especially in the United States. According to its latest form 20-F, quartz countertops continue to steal market share from other materials such as laminate and granite. Its Supernatural collection and its agreement to distribute quartz countertops to all U.S. IKEA stores drove revenue, net income, and free cash flow increases of an incredible 20%, 60%, and 122%, respectively, last year.

The company is still small, with 2013 revenue of $357 million, meaning it faces a great deal of growth potential as long as the housing recovery holds. Its success translated into a pristine balance sheet, with cash and long-term debt-to-equity clocking in at 35% and 5% respectively. Currently, the company pays no regular dividend.

Big-box home improvement
Home Depot represents the largest publicly traded home improvement retailer, with 2,263 stores -- exceeding its rival Lowe's by about 433 stores -- making it a market leader and providing Home Depot with greater economies of scale. In 2013, Home Depot's revenue, net income, and free cash flow increased 5%, 19%, and 11%, respectively. Customer transactions increased 2%.

Home Depot's balance sheet looks a little worse than the previous year. The company retained cash amounting to 15% of stockholders' equity at the end of 2013. Home Depot's long-term debt increased 55% in 2013, as it issued debt to buy back shares. However, interest expense increased 13%, putting a crimp in profitability as a result. Home Depot paid out a frugal 36% of its free cash flow in dividends. The company pays its shareholders $1.88 per share per year in dividends and yields 2.3%.

Decks and porches
Trex makes materials for the construction of decks, porches, and fencing. Most of Trex's products come from a "proprietary process" that involves the combination of "waste wood fibers and reclaimed polyethylene," according to its form 10-K. In 2013 Trex's revenue increased 11% while net income increased 1,200% to $35 million, stemming partly from a special non-cash tax adjustment. Larger distribution and increased demand contributed to top- and bottom-line growth stemming from the housing recovery.

Free cash flow declined 39% stemming from larger capital expenditures and higher inventory.Trex's cash only amounts to about 4% of stockholder's equity, which doesn't provide much room for margin of error in this highly cyclical business. However, there is no long-term debt on its balance sheet. This company doesn't currently offer a dividend, which means the business focuses its cash flow on expanding market share through new products and expansion.

Things to look for
Warren Buffet said, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." With that said, if the housing sector begins a new decline, then the stock prices of all three companies will experience a sharp fall. Caesarstone's small scale may leave the company vulnerable regardless of its pristine balance sheet. Trex may start bleeding red in that scenario. Home Depot may see a reversal in top and bottom line growth but its scale may leave it intact. But for the time being, the current housing recovery will fuel the growth of these respective companies. The chance of a housing bust represents a risk you need to assume if you want to invest in these companies. I invite you to track their progress on the Motley Fool Watchlist.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$400.42 (-0.05%) $0.19
Trex Company, Inc. Stock Quote
Trex Company, Inc.
TREX
$133.92 (0.87%) $1.15
Caesarstone Ltd. Stock Quote
Caesarstone Ltd.
CSTE
$10.73 (-3.94%) $0.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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