With lower interest rates, it's time to consider some housing-related stocks. The housing market is always interest-rate-sensitive due to the influence of mortgage rates on house pricing and sales. Home Depot(NYSE: HD) is an obvious choice and an acceptable and worthy option when people are spending more on their homes. Still, I think pool products and water solutions company Pentair(NYSE: PNR) is arguably a better buy for exposure to the housing market theme.
Home Depot and housing
Lower interest rates will inevitably improve Home Depot's prospects. That said, the stock's valuation (about 28 times the Wall Street consensus for earnings in 2024) arguably reflects the expectation that improvement is coming. And, as I previously discussed in an article on Home Depot, Home Depot's customer transactions have declined on a year-over-year basis since the second quarter of 2021.
It's a pivotal marker to watch for with Home Depot because price increases might prove difficult to implement in a lower inflationary environment.
Lower interest rates likely mean more new pools
While Home Depot is worth watching closely, Pentair appears to have upside potential in the near, medium, and long term, and the three reasons to buy it can be considered in those time frames.
Starting with the near term, it's no secret that a slowing housing market has negatively impacted demand for new pools. Pentair CEO John Stauch told investors in July that "new in-ground pools built in 2024 are now expected to be near the 60,000-pool range compared to roughly 72,000 in 2023 and roughly 78,000 in 2019." Other estimates for new pools built in 2024 have also come down through the year.
This demonstrates the sensitivity of new pool construction to housing market conditions. If interest rates move lower through 2025, it's reasonable to expect an improvement in the housing market and spending on new pool construction.
Image source: Getty Images.
Pentair's other two segments (flow and water solutions) are also exposed to the residential market and should get a boost when it does. About 39% of flow sales (fluid treatment pumps and systems) go to the residential and agriculture sector. Meanwhile, about 33% of water solutions sales (commercial and residential water treatment systems) go to residential solutions. The company's net sales are roughly evenly split among its three segments.
Pool products are a growing market
While the improvement in the housing market will provide a near-term boost to Pentair's sales, it's important to note that 80% of the pool segment's sales are to the existing pool market. In addition, while new pool construction is declining in 2024, the number of pools is still expanding, supporting the long-term growth opportunity in the pool products market.
Management says that nondiscretionary spending per pool is around $400. Furthermore, the increasing adoption of automation in pools, as well as new lighting, variable-speed pumps, and high-efficiency heating solutions, opens up the long-term potential for sales growth in the existing pool market.
Image source: Getty Images.
Restructuring will result in improved profitability
Alongside the near- and long-term growth catalysts, Pentair's management is undertaking an ongoing set of transformational initiatives to improve its return on sales from 20.8% in 2023 to 24% in 2026.
Stauch believes these initiatives -- which encompass targeted pricing, improved sourcing, lean management techniques, and investing in automation -- are necessary to improve the efficiency of businesses acquired over the last 30 years. Underpinning these initiatives is the implementation of the 80/20 rule, or the Pareto principle that 80% of outcomes come from 20% of causes, in organizing its sales, product lineup, and manufacturing.
A stock to buy
Pentair isn't just a play on an improving housing market; it's also a company in the throes of a transformational margin-improving initiative with excellent long-term prospects from ongoing increases in the installed base of pools and improvements in water quality. Trading at 23 times estimated 2024 earnings, Pentair has outstanding growth prospects over the next decade. The company trades at a discount to Home Depot and has better growth prospects.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.
