By: Steve Smith
Here is another way to play a housing recovery. This company will benefit from a booming home improvement market.
It’s no secret I’ve been bullish on an improving housing market making Lennar (LEN) my top pick for 2015 back in December. More recently I’ve been looking for ancillary ways to profit from the fact that homeowners and landlords alike are willing to invest in properties now that their values are steadily rising.
Two of the new reasons to like the sector is the tailwind of lower energy prices and housing related companies generate all their sales domestically which insulates them from the negative impact of a stronger U.S. dollar.
We recently scored some quick green in Scotts Miracle Gro (SMG) as the calls we purchased have more than doubled in less than two weeks as the stock sprouted up towards the $70 price target.
This morning I’ve identified Masco (MAS) as candidate on which we can build more profits. The company is the leading provider of building and home improvement products such as windows, cabinets, kitchen counter tops and faucets under brands such as Delta and Kaftmaid. It sells its products directly to home builders and through major retail channels such as Home Depot (HD).
In 2014 it recorded $2.6 billion profit on $8.5 billion sales. The expectations are for a 6% top and 12% bottom line increases in 2015. I think the company is poised to do better and shares should climb as the current 14x p/e expands to reflect increased growth.
New and Improved
Masco (MAS) derives about $1.4 billion or 20% of its revenues through sales directly to homebuilders for new construction. The bulk of that came from selling third party products such as insulation, gutters and garage doors. But distributing third part products never fully meshed with its own business and culture and new construction is a notoriously cyclical business. The latest down turn since housing bubble has been especially steep.
Last November, Masco announced it would spin off that division in order to streamline and focus on its core product line. The spin off should occur by June which will not only provide short term catalyst but will help the company to provide a more predictable, and I believe higher, earnings guidance.
While new homes construction have stalled over the past few months there is veritable boom in the improvement business. While high profile TV makeover shows such the Property Brothers which was recently featured on CNBC focus on individual homeowners, who are certainly spending on their own homes, the far larger market that can produce faster earnings growth will come from landlords of multi-unit properties.
The most cost effective and biggest return on investment for apartment, condo or house is to update the kitchen and bathrooms with new cabinets and fixtures. Rents have surged over the past few years due to demand from young professionals not interested in buying. Landlords looking to capitalize on this competitive but lucrative market will want to upgrade their properties as leases signed during the trough in three to five years ago rollover.
I think these multitude trends set the stage for a strong second half 2015. The technical picture is also constructive with the stock in decent long term uptrend and currently holding above the 50 dma near the $25 level.
I want to keep this very straightforward. I’m simply purchasing longer dated calls that are slightly out-of-the-money.
-Buy the October $28 calls for $1.40 a contract
I have an upside target of $33 a share. Given the low cost and long time horizon of these calls there is no need to set a stop loss at this point.
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