What’s In A House – Sadly Not Enough

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In research published yesterday, we look at the US New Home business and how it impacts the Industrials and Basic Industries sectors.  We also introduce research on the Building Materials group for the first time.

Housing is a bright spot – or a potential bright spot in the US – new home builds look like they are going to accelerate, with demand up and building permits increasing.  Homebuilders and building material producers outperformed the broader market significantly in June.   A bright spot perhaps, but it is likely not enough to offset other issues.   New housing is only a portion of “housing” based demand.  The refurbishment market has been very robust for the last few years as reflected in sales from the paint companies and retailers like Home Depot and Lowes.  New homes are incremental to most suppliers, particularly in products like paint, tile, roofing material, some wood applications and cabinetry.

Even the Building Material companies themselves have no more than 30% of sales tied to new homes.  The next on our list is Electrical Equipment (7%) and Chemicals (5%).  Within each sector there are companies with much higher exposure than the average as well as those with minimal exposure.  So new housing growth will be good for select companies but it is not a panacea for industries facing other demand headwinds in the US and more difficult headwinds overseas. 

Looking at the Building Material companies (in the US these are mainly smaller aggregate producers as Warren Buffet and the Europeans have bought the rest) there is more exposure to general infrastructure and construction than new housing. Stock values discount a broad recovery, in our view, not just housing.  This is an interesting and forward looking conclusion as it is likely (perhaps the right word is hopeful) that whoever wins the US election will do so on the economy and on jobs and, post election, we should see some construction/infrastructure stimulus.   But that is a long way away and much can happen between now and then.

If it looks like there is consensus building around some sort of job stimulus package and appropriate post election policy, it is probably better to play the more levered sectors, such as Metals (steel), E&C and Capital Goods.  If we do not get some sort of consensus, most of the housing exposed stocks look very expensive if housing is the only game in town.

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