Gene Walden: Home-building industry looks to be recovering

THE MINNESOTA INVESTOR

GENE WALDEN

Mired in a dismal slump the past three years, the home-building industry is finally showing some signs of life. Most stocks within the sector have dramatically outperformed the overall market this year.

And recent action in Washington extending the new home buyer tax credit has boosted the sector even further, according to Megan McGrath, an analyst with Barclays Capital in New York, who reported that builder stocks and building products stocks have both outperformed the market since the bill was passed.

"In its current form, the bill would not only extend the credit, but would also include move-up buyers, as well, for home owners who have been in their current home for at least five years," said McGrath. "The version would increase prior income limits to $125,000 for an individual and $225,000 for a couple, up from $75,000 and $150,000 respectively."

First-time home buyers can receive a tax credit of up to $8,000 on the purchase of a home, while current homeowners who move up to a more expensive home can get a $6,500 tax credit. The new bill extends the deadline to individuals who purchase a house before April 30, 2010, as long as they complete the transaction within 60 days. The credit is available for homes that cost less than $800,000.

While McGrath said she believes the new bill will contribute to a revival of the home market, she warned that the impact may be limited. She pointed out that only about 350,000 of the nearly 2 million home buyers to file a claim under the program so far would not have purchased a home without the credit. She estimates that the extension will spark about 300,000 more sales from individuals who otherwise would not have made a purchase. And only about 30,000 of those transactions would be new homes. "That would represent about a 7 percent boost to our current 2010 new home sales estimates," she said.

In addition to the home-building market, McGrath points out that the remodeling market index for the third quarter, compiled by the National Association of Home Builders, showed increasing strength. "Both the index of current market conditions and the index of future expectations continued to rise sequentially for the third consecutive quarter since bottoming in fourth quarter of 2008."

A number of building-related stocks have bounced back this year after dropping dramatically the past two years. Here are some of the market leaders:

•Stanley Works (SWK). The tools manufacturer recently announced the acquisition of Black & Decker, which gives the company a significant share of the tools industry. "The two companies sell complementary products into similar distribution channels, allowing for significant overhead, purchasing, distribution and sales force take-out, with almost no product overlap," according to Sam Darkatch, an analyst with Raymond James. "Investors will have to accept more exposure to the weak consumer and construction end markets, but the financial appeal of the deal is profound and augurs well for future earnings.'' The stock closed Friday at $50.28 a share -- more than double its 52-week low of $22.50. The stock has a price-earnings ratio (PE) of about 23 and pays a dividend yield of about 2.6 percent.

•Toll Brothers (TOL). The home-building operation sparked a rally in the housing market last week with the release of its preliminary fourth-quarter results. The company reported that contracts for new homes rose 42 percent compared with a year ago, to 765 units, and the value of the contracts rose 62 percent. The stock closed Friday at $20.76 -- up about 50 percent from its 52-week low of $13.55. The stock pays no dividend.

•Home Depot (HD). The building goods retailer has experienced a modest drop in revenue and earnings in recent quarters, but it should benefit from a revival in the home construction and remodeling industry. The stock closed Friday at $27.34, up from its 52-week low of $17.46. The stock pays a dividend of about 3.5 percent.

•Lowes Companies (LOW). Like its chief competitor, Lowes has experienced a drop in revenue and earnings recently, but it could bounce back as the housing market recovers. The stock closed Friday at $21.85, up from its 52-week low of $13. It pays a dividend yield of 1.7 percent.

•Lennar (LEN). The Miami-based home builder has suffered recently, with a loss of $7.68 per share the past 12 months, but it has seen a steady climb in its stock price this year as investors bet on a housing recovery. The stock closed Friday at $14.47 a share, up about 300 percent from its 52-week low of $3.42. It pays a dividend yield of about 1.1 percent.

Gene Walden lives in the Twin Cities and is the author of more than 20 books about business and investing. Send questions to gwalden100@comcast.net.