3 Stocks That Will Benefit From a Housing Market Rebound

Submitted by Investing Daily as part of our contributors program.

By: Chad Fraser

Prospects for a housing market rebound brightened somewhat on Tuesday, when the National Association of Realtors reported that sales of existing homes rose 3.4% in April, to 4.62 million from 4.47 million in March. That topped the 4.6 million sales that analysts were expecting. On a year-over-year basis, sales increased by 10%.

Median prices jumped 10.1% from a year ago, their biggest rise since January 2006, as sales of foreclosed properties eased and the market shifted toward higher-priced homes.

“The level is still well below prerecession norms,” Michael Moran of Daiwa Capital Markets America told MarketWatch.com, “but the recent pattern shows a bit of improvement.”

A housing market rebound would be an obvious plus for stocks, but some companies will benefit more than others. Below, we take a look at three stocks that are closely tied to the housing market. Two are leading home-improvement retailers, and the other is a major paint supplier.

A Housing Market Rebound Would Give Home Depot’s Results a Big Push

Home Depot (NYSE: HD) has been on a real tear of late; the stock is up over 30% in the past year, to $48.74. Even so, it still trades at a reasonable p/e ratio of 18.2.

The world’s largest home improvement retailer recently reported that its sales rose 5.9% from a year ago, to $17.81 billion. Profits jumped 27.5%, to $1.04 billion, or $0.68 a share. The latest earnings beat Wall Street’s expectation by $0.04, while sales fell slightly short of the $17.96 billion that analysts were looking for.

The company caught a tailwind from the record-warm winter temperatures, which prompted consumers to get an early jump on their home renos. However, that was tempered somewhat by a return to more normal temperatures in April.

The improved results also prompted Home Depot to raise its earnings guidance for 2012. It now expects profits of $2.90 a share, up from its earlier prediction of $2.79. A further housing market rebound would give the company even more growth momentum.

Lowe’s Needs a Housing Market Rebound Even More than Home Depot

The story was different at rival Lowe’s (NYSE: LOW), whose share price fell sharply after it cut its full-year forecast even though it reported improved earnings on May 21.

In the first quarter, Lowe’s sales rose 7.9%, to $13.2 billion from $12.2 billion a year ago. Earnings improved 14.3%, to $527 million, or $0.43 a share. Both numbers beat analysts’ expectations of $0.42 a share in profit on revenue of $12.99 billion.

Lowe’s also benefited from the warm winter weather. Even so, the company cut its 2012 earnings guidance to $1.73 to $1.83 a share from its earlier prediction of $1.75 to $1.85. That’s partly because Lowe’s is now in the midst of a delicate transition from having regular sales on merchandise to an everyday low prices model.

The company has a lot riding on these changes, says Christopher Horvers, an analyst for JP Morgan Chase: “With turnarounds in retail you have to be very patient. You get out of the way for the hard part, and then you own it when things start to get better. We’re in the hard part now with Lowe’s.”

Depending on the company’s progress, said Horvers, “maybe later in the summer it’s a name you start to look at.”

Both Lowe’s and Home Depot would obviously benefit from a sustained housing rebound. But Home Depot, with its dominant market position and faster earnings growth, looks like the better growth stock.

Sherwin-Williams Goes Global

They say one of the best bang-for-your-buck home improvements you can do is to simply slap on a coat of paint, and judging by the recent performance of Sherwin-Williams (NYSE: SHW), many homeowners are taking that advice to heart.

The stock is up 31.9% this year, but that gain is backed by solid performance. In April, the company reported that its sales rose 15.1%, to $2.14 billion. That’s a new record, and well ahead of the Street’s expectation of $2.08 billion. Profits jumped 50.8% to $0.95 a share from $0.63, topping the consensus forecast by a penny.

Sherwin’s raw material costs have been rising, but so far it has been able to handle this both by keeping a lid on its other expenses and raising its prices.

What’s exciting about Sherwin is that it’s much more than just a play on a U.S. housing rebound. It also has significant exposure to fast-growing overseas markets, where demand for its paints should keep rising as those countries’ citizens trade up for bigger homes.

In its latest quarter, Sherwin’s Latin America Coatings Group and its Global Finishes Group supplied 32% of its overall sales. Both divisions saw revenue gains of 11% and 7.1%, respectively.

The company has also raised its dividend every year for the past 34 years. The current quarterly rate of $0.39 a share yields 1.30% on an annualized basis.

Article originally posted here.