Investors willing to take a contrarian view and those who like value situations may be looking at housing-related stocks now. It's a challenging real estate market, and likely to remain so as long as interest rates stay relatively high.
However, rates won't stay where they are forever and, historically, more accommodative interest rate environments have led to recoveries in the housing market.
Stocks like Owens Corning(NYSE: OC) and Stanley Black & Decker(NYSE: SWK) could be set to benefit. However, Wall Street analysts are taking contrasting views on these two stocks.
Moving in opposite directions
In a nutshell, analysts are taking increasingly positive views on roofing, insulation, and composites producer Owens Corning while moving the other way for tools and industrial products maker Stanley Black & Decker.
I share these opinions, and believe that the core difference between the two investment propositions is that Owens Corning is a company operating well within its end markets. However, there are still question marks around Stanley Black & Decker.
The case against Stanley Black & Decker
On Tuesday, Barclays analyst Julian Mitchell downgraded Stanley Black & Decker stock to equal weight from overweight and cut his price target to $86 from $100, expressing the view that the company needs to reduce inventory and may need to invest to win back market share. This is a reasonable argument.
There's a robust case for buying the stock based on its restructuring plan to cut costs by $2 billion by 2025 through coordinated actions such as reducing its product ranges, reducing the number of suppliers it uses, consolidating facilities, and adopting lean manufacturing initiatives. Meanwhile, the company continues to reduce its inventory to levels in line with historical norms.
Unfortunately, there are two matters of concern. First, while the company is reducing inventory, its sales continue to be under pressure due to a weak demand environment, so its inventory-to-sales ratio is still disappointing. More work needs to be done, and reducing inventory in a declining sales environment isn't easy.
Fundamental Chart data by YCharts.
Second, management previously outlined a need to spend $300 million to $500 million to try and regain market share from competitors. While there's nothing wrong with a company investing to generate growth by winning market share, it also indicates that the company's problems in recent years are the result of more than just weaker demand from the DIY market.
As such, investing in the turnaround story of Stanley Black & Decker also demands a belief that the company will execute better within its end markets.
Owens Corning is better positioned
In contrast, Owens Corning is a company outperforming its end markets, and that's partly why Barclays analyst Matthew Bouley on Monday raised his price target on the stock to $190 from $160 (though he maintained his previous hold rating), and RBC Capital's Mike Dahl late last month boosted his price target to $201.
While the overall housing market remains sluggish, not least the repair and remodeling market, there are pockets of relative strength. One of them is the single-family new residential construction market. Due to affordability issues and a low inventory of existing homes for sale, entry-level homebuyers have turned to the new construction market.
US New Single Family Houses Sold data by YCharts.
That's excellent news for Owens Corning's roofing sales, which are boosted by repair and remodeling activities related to damage, including significant storm damage, as well as new construction. As management notes in its Securities and Exchange Commission filings, "Sales in this segment do not always follow seasonal home improvement, remodeling, and new construction industry patterns as closely as our Insulation segment."
Indeed, Owens Corning's roofing segment sales were up 7% in the first quarter, compared to a 2% decline for the insulation segment (which is more closely tied to the repair and remodeling market in general) and an 11% decline in its composites business.
The end result was a 1% decline in overall sales. However, a $77 million increase in roofing profits led to a 22% year-over-year increase in overall adjusted earnings before interest and taxation (EBIT) to $438 million in the first quarter. A combination of price increases and lower manufacturing costs drove profit improvement in roofing, and gave testimony to the strength of the company's market position in the space.
In short, Owens Corning is executing well, and its acquisition of residential door company Masonite last month adds complementary building products to its arsenal of solutions.
Suppose the current moment proves to be a trough in the housing market overall. In that case, Owens Corning is well-placed to take advantage of a recovery, and Wall Street's optimism over the stock, which trades in less than 12 times estimated 2024 earnings, is warranted.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Owens Corning. The Motley Fool has a disclosure policy.
