A Solid Floor Under Housewares

S&P expects the sector's major players, such as Fortune Brands and Newell Rubbermaid, to benefit as a recovery gains strength

By Sam Stovall

As I mentioned in last week's column, S&P has changed the way it calculates the industries with top Standard & Poor's . After we switched to a 12-month from a six-month time horizon, we found that many of the industries on the list had carried over from the most recent six-month rankings.

One example is the group we're featuring this week, Housewares & Specialties, which includes makers of a wide array of consumer products like plumbing fixtures, storage containers, glassware, and the like. Investors have cozied up to this industry in 2002: Through May 17, the S&P Housewares & Specialties Index rose 31.1% year-to-date, vs. a 2.4% decrease in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600). S&P analyst Howard Choe continues to have a positive near-term investment outlook for the housewares group.

GOOD FORTUNE.

  Choe says shares of Fortune Brands (FO ) -- a major index component -- are leading the group, as investors gain confidence that the company will benefit from an economic recovery. Industry fundamentals have improved, with raw-materials costs having moderated and the U.S. dollar having eased against the euro. The business lines of some of the industry's companies are sensitive to economic cycles, meaning that the industry should benefit from a slowly improving economy. Overall, Choe believes the Housewares & Specialties Index should outperform the market for the next 12 months.

Due to current economic conditions, he anticipates sales-volume growth for the housewares industry will be weak in the first half of 2002 but will pick up in the second half. Choe expects housewares companies to post low- to mid-single-digit sales gains in 2002. He cites S&P's expectation that major global economies will follow the path of the U.S., where growth is now soft but could pick up once the war on terrorism begins to wind down and the benefits start to kick in from the various economic stimuli recorded over the past 12 months.

Fortune Brands, ranked 5 STARS (buy) by S&P, is a bit of a special case. It has a diverse range of businesses: home and hardware products, office products, golf equipment, and spirits and wine. (Since its home and hardware products business makes up the largest percentage of Fortune's sales, some 37%, it's included in the Housewares & Specialties Index.)

BIGGER LOOKS BETTER.

  Choe says that while the company's golf and office-products divisions are unlikely to improve until 2002's second half, its home products and spirits divisions should hold up well, thanks to a solid housing market and distribution growth within the spirits unit.

Newell Rubbermaid (NWL ), another index component, has also performed well. Choe says a new management team is in the midst of working on a major turnaround. The effort has yielded some positive results, including improvements in cash flow and the balance sheet. Choe also notes management's work to boost sales. Newell is ranked 5 STARS.

Over the longer term, Choe has a modestly positive investment outlook for the industry. He expects the group to perform in line with the S&P 1500 and for the industry's biggest players to continue to grow. Why? Mainly because cost-conscious megaretailers, such as Wal-Mart, seek partnerships with only large housewares suppliers that can deliver an enormous inventory of well-known brands on short notice.

S&P Relative Strength Rankings

These industries carry 12-month relative strength rankings of "5" as of May 17, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.

Industry/Sector Largest Company (Market Cap.) S&P STARS* Rank
Catalog Retailers/Consumer Discretionary Lands' End (LE) 3 STARS
Computer & Electronics Retail/Consumer Discretionary Best Buy (BBY) 4 STARS
Consumer Electronics/Consumer Discretionary Harman International (HAR) Not Ranked
Health Care Facilities/Health Care Tenet Healthcare (THC) 5 STARS
Home Furnishings/Consumer Discretionary Leggett & Platt (LEG) 4 STARS
Homebuilding/Consumer Discretionary Clayton Homes (CMH) 5 STARS
Housewares & Specialties/Consumer Discretionary Fortune Brands (FO) 5 STARS
Managed Health Care/Health Care UnitedHealth (UNH) 5 STARS
Metal & Glass Containers/Materials Pactiv (PTV) 5 STARS
Specialty Stores/Consumer Discretionary Barnes & Noble (BKS) 5 STARS
Water Utilities/Utilities American Water Works (AWK) 3 STARS

*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).

Stovall is chief sector strategist for Standard & Poor's

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