Buffett’s USG Leads Building-Supplier Gains as Housing Steadies
Building-materials suppliers battered by a six-year slump in U.S. new-home construction are rallying as investors bet that the worst is over.
USG Corp. (USG), the wallboard producer whose largest investor is Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), rose 71 percent this year before today to lead the advance among a group of 22 U.S. materials makers, based on data compiled by Bloomberg. That beat the 12 percent jump in the Standard & Poor’s 500 Index.
“They are some of the biggest gains you could have, but they’re the hardest decisions to make because it takes the most faith,” said Bill Smead, portfolio manager with Smead Capital Management Inc. in Seattle, which oversees $190 million and holds Home Depot Inc. (HD) in its Smead Value Fund to take advantage of the improving housing market. “The market is anticipating 9 to 12 months ahead, and that’s this rally.”
The industry is signaling that a rebound may be under way even with housing starts mired near the lowest levels in more than 50 years. A gauge of homebuilder sentiment has risen five straight months in the longest climb since 2003 and may extend the streak when new data are released March 19, according to economists surveyed by Bloomberg.
That’s translating into 2012 stock-price increases for the makers of faucets, paint and other materials used in new-home construction and remodeling.
‘Coming Into Place’
“It’s not up, up and away,” said John Kasprzak Jr., an analyst at BB&T Capital Markets in Richmond, Virginia, whose recommendations include buying shares of insulation maker Owens Corning (OC) Inc. and holding USG. “The point is that the pieces are coming into place in the puzzle for a cyclical upturn.”
USG’s surge reverses a 40 percent plunge in 2011. Cement- and-wallboard maker Eagle Materials Inc. (EXP) and Armstrong World Industries Inc. (AWI), a manufacturer of flooring and cabinets, both rose at least 30 percent this year through yesterday.
Owens Corning, furnace-maker Lennox International Inc. (LII) and Fortune Brands Home & Security Inc. (FBHS), which makes Moen faucets and Therma-Tru doors, rose more than 25 percent this year through yesterday.
“There are areas for opportunity in this sector particularly because it’s been so depressed,” said Michelle Meyer, senior U.S. economist at Bank of America Corp. in New York. “You don’t need to see that big of a turnaround in activity to start to matter for these businesses. If they have a longer time horizon, this could be a very attractive place to start investing.”
While U.S. housing starts rose in each of the past two years after tumbling 39 percent in 2009, the market remains historically weak: 2011’s total was less than a third of the 2.07 million peak in 2005, Commerce Department data show.
Starts in February probably ran at an annual rate of 697,000, the average estimate of economists surveyed by Bloomberg ahead of a March 20 Commerce Department report. January’s rate was 699,000 units.
“There are a lot of people making bets that we’re at an inflection point,” said Bob Stewart, an executive vice president of Dallas-based Eagle. “We’ll see.”
Price increases are one measure of stability for an industry emerging from a free fall. Eagle is now raising cement prices by $5 to $8 a ton (907 kilograms) in most markets and boosted wallboard prices in January by 35 percent.
“In some regions of the country we are definitely seeing some green shoots,” Stewart said in an interview. “How sustainable they are, I don’t know.”
Eagle may post its first annual revenue increase since 2007 in the fiscal year ending March 31. Still, sales of $490 million, the average estimate of 12 analysts in a Bloomberg survey, would be 43 percent lower than for fiscal 2006.
Masco Corp. (MAS), the maker of KraftMaid cabinets and Behr paint, has cut employment “basically in half,” Chief Executive Officer Tim Wadhams said at a March 6 conference. The Taylor, Michigan-based company had 31,000 workers at the end of 2011.
The Chicago-based company is “entering 2012 with very modest expectations,” according to CEO James Metcalf. He said on a Feb. 6 conference call that USG has been “0-for-4 on where we think the market’s been the last four years.”
His caution echoed the sentiments of Buffett, whose Berkshire Hathaway held 16.2 percent of the outstanding shares in USG as of Dec. 31. The billionaire investor said last month in his annual letter to shareholders that he was “dead wrong” in 2010 in predicting a housing recovery would happen within a year.
USG jumped 12 percent yesterday to $17.41 at the close in New York, while Eagle gained 3 percent to $35.23. Armstrong World was up 0.1 percent to $57.13, and Owens Corning rose 2.6 percent to $36.98 for the eighth advance in nine trading sessions.
The suppliers’ rally follows a 31 percent jump in the Standard & Poor’s 1500 Homebuilding Index. (S15HOME) Los Angeles-based KB Home (KBH) led the gauge of 11 companies with a 94 percent jump, after plunging 50 percent in 2011. Whirlpool Corp. (WHR), whose appliance lineup includes refrigerators and dryers, soared 66 percent this year before today, while Home Depot, the biggest home- improvement retailer, has climbed 17 percent.
Robert Dye, chief economist at Comerica Bank in Dallas, sees “moderate improvement” in existing home sales, which ran at an annual rate of 4.57 million in January. A potential negative looms with foreclosed homes coming into the market, he said.
“It’s justified to feel a little more optimistic about housing,” Dye said in an interview. “But at the same time there are still a lot of risks.”
While February’s U.S. home-foreclosure tally of 206,900 was down almost a third from two years earlier, it was still almost double the 2006 figure, RealtyTrac Inc. data show.
RealtyTrac CEO Brandon Moore said this week that the $25 billion settlement between state attorneys general and the five largest home lenders removed some barriers to property seizures, setting up foreclosure increases in the coming months.
For investors, one of the questions is whether housing- related stocks are outpacing the market’s fundamentals, said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina.
‘Little More Exuberant’
“I sense that folks are beginning to get ahead of themselves and thinking ‘Alright, let the good times roll’ when really the recovery is just getting started,” Vitner said in an interview. “The stock market tends to get a little more exuberant about things. It’s anticipatory.”
Vitner estimates there will be a 10 percent increase in new housing starts in 2012, and that it may take four or five years to return to the usual annual level of about 1.6 million units.
For Alex Hannigan, president of a custom homebuilding firm in Orlando, Florida, that bears his name, progress is measured by recent standards, not the benchmarks of the last decade.
He built two houses last year, after completing just one in 2010 and 13 in 2006 and 2007. Average prices have slipped to about $900,000 now from about $1.2 million then, he said.
“I personally feel we have gotten to a point where we are at the bottom,” he said. “I envision this being a better year. If I can build three this year, four the next and five the next, I would be happy.”
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