Home Is Where The Heart Is

HOMEBUILDING IS DOWN BUT NOT OUT

The January reading for new-home sales is due next week, but the figure rose 2.3% in December. This was better than pessimistic projections, though the naysayers argue that this is a small segment of the overall housing market.

Interest rate volatility and economic uncertainty haven taken a toll on recent sales as demand has slowed and cancellations have jumped. Nevertheless, a shortage of housing in the U.S. and elevated rents still make home ownership a desirable proposition for many.

Long-time CEO and founder of MDC Holdings (MDC) Larry Mizel said at the end of January, “Despite the near-term challenges facing our industry, we remain confident in the long-term outlook for new home construction. Existing home inventory remains at a historically low level on a national basis and there continues to be a strong desire for home ownership by a large segment of the population. We believe that comparisons made between this housing correction and the one we experienced during the 2007 and 2008 financial crisis are unwarranted. U.S. households are in a much better shape today than they were 15 years ago. And today’s unemployment levels remain incredibly low despite the best efforts of the Federal Reserve to slow the economy.”

He added, “In addition, we have a much more stable and closely regulated mortgage finance system in place today which has curtailed much of the speculative activity that led to the last downturn. We also have the benefit of hindsight and wisdom that comes from weathering a difficult downturn, which has led to a more resilient and return-focused industry. All of these factors give us confidence in the future of our industry and the outlook for our company.”

Certainly, I understand that earnings comparisons will not be good in 2023, given that MDC posted profits of more than $8 per share in 2022, but the geographically diverse homebuilder is expected to remain solidly profitable, with net income strong enough to continue to cover the hefty dividend.

MDC yields more than 5% and the payout has risen over time, while management has also paid out special 8% stock dividends on more than a few occasions. I also like that the balance sheet is not aggressively structured, so that the company can take advantage of long-term land opportunities that will emerge in an industry downturn.

PERIPHERAL PLAYERS

Long-term housing trends, I think, are also favorable for peripheral players like WhirlpoolWHR
and Lowe’s Co’s (LOW).

Like most businesses involved in manufacturing, Whirlpool has had to contend with supply constraints and raw-material-cost inflation, which when coupled with higher interest rates and slowing home sales has created some stiff near-term headwinds. However, these challenges are nothing new as the company has navigated similar bumps in the road during its 111 years of operations. The appliance maker generates sizable free cash flow and renovation-related business in North America ought to remain solid in the near term. Longer term, though the company did just choose to divest much of its European and African businesses, we think Whirlpool will benefit from non-North American markets as the rest of the world progresses technologically and emerging markets incorporate modern conveniences into daily living.

Whirlpool trades for just 9 times estimated earnings and yields 4.8%.

Earnings for home improvement retailer Lowe’s are due out top of March, but management increased its fiscal 2023 outlook back in November, reflecting stronger-than-expected operating results. The company now expects EPS of $13.65 to $13.80 (previous guidance was $13.10 to $13.60) on approximately $97 to $98 billion of sales. Home improvement fundamentals are still favorable as many have sizeable equity in their homes despite the recent slump.

CEO Marvin Ellison explained, “You’ve heard me talk about this before, but demand drivers for home improvement are distinctly different from those that drive home building. So, it’s important not to confuse the two. And as a reminder, at Lowe’s, the three highest correlating factors of home improvement demand are home price appreciation, age of housing stock, and disposable personal income…Even if there is a broad-based decline in home prices, homeowners currently have a record amount of equity in their homes, nearly $330,000 on average, which remain supportive of home improvement investment.”

Shares of LOW change hands at 15 times estimated earnings, well below the historical average in the 18 to 20 range, while the stock offers a decent 2.0% yield.

BE GREEDY WHEN OTHERS ARE FEARFUL

History suggests that the time to buy stocks in cyclical industries is when the cycle has turned lower and prices have fallen. I think MDC, WHR and LOW offer patient investors handsome capital appreciation potential with generous income along the way.

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Stay tuned for additional themes and stocks in the weeks ahead and happy investing!