Rising interest rates and elevated inflation have weighed on home improvement spending as consumers have become increasingly price sensitive. However, with the likelihood of a hike rate pause in sight, home improvement demand is expected to rebound.
Amid this backdrop, it could be wise to invest in quality home improvement stocks, The Sherwin-Williams Company (SHW), Frontdoor, Inc. (FTDR), and Steelcase Inc. (SCS), this month.
While inflationary pressures and higher mortgage rates have deterred consumers from moving into a new home, undertaking home improvement projects seem more pocket-friendly. Last year, Americans spent an average of $8,484 on home improvement projects, reflecting a 2% increase from the pandemic era, per Angi’s 2022 State of Home Spending report.
However, with inflation moderating over the past few months and a strong labor market, experts remain optimistic about the industry’s prospects. Ben Johnston, chief operating officer at Kapitus, said, “We expect the overall cost of home renovations to stabilize during 2023, as the economy slows and inflation moderates.”
Furthermore, the global home improvement services market is expected to reach $423.90 billion in 2027, growing at a CAGR of 5% due to technological advancements such as visualization apps and 3D software and increasing demand for home remodeling. On top of it, the global remodeling market is projected to grow significantly to reach $5.46 billion by 2029.
Additionally, the Inflation Reduction Act might entice homeowners to embark on renovation projects as it offers a wide range of tax credits for installing solar panels and other energy-efficient products.
The Act’s modified and extended 25C provision increased the credit range from 10% to 30% of the costs for qualified energy-efficient improvements made during the year, up to $3,200.
Thus, despite current market uncertainties, the home improvement industry might be worth investing in. That being said, let’s evaluate the above-mentioned stocks in detail:
The Sherwin-Williams Company (SHW)
SHW is engaged in the manufacture, distribution and sale of paints, coatings and related products to professional, industrial, commercial and retail customers. The company operates through three segments: The Americas Group; Consumer Brands Group; and Performance Coatings Group.
On April 19, SHW entered into a purchase agreement with Akzo Nobel NV, a global coatings company, to sell its architectural paint business in China. This business is responsible for the production and sale of decorative paints under the Huarun® brand in China, generating an annual revenue of around $100 million.
“The divestiture of our China architectural paint business aligns with our ongoing strategy to optimize our portfolio, brands and customer programs to drive continued value for our shareholders,” said SHW’s Chairman and Chief Executive Officer, John G. Morikis.
On the same day, the company declared a regular quarterly dividends of $0.605 per common share, payable on June 2, 2023. SHW’s four-year average dividend yield is 0.84%, while its annual dividend of $2.42 translates to a 1.04% yield on the prevailing prices.
Its dividend payouts have grown at CAGRs of 13.5% and 16.2% over the past three and five years, respectively. Also, it has a record of 44 years of consecutive dividend growth.
SHW’s net sales increased 8.9% year-over-year to $5.44 billion in the first quarter (ended March 31, 2023), while its gross profit rose 17.9% from the year-ago value to $2.42 billion.
The company’s net income and adjusted net income per share amounted to $477.40 million and $2.04, representing increases of 28.7% and 26.7% from the prior-year period, respectively. Also, its adjusted EBITDA increased 26.9% from the year-ago value to $879.10 million.
Analysts expect SHW’s revenue and EPS for the second quarter (ending June 30, 2023) to increase 2.6% and 9.8% year-over-year to $6.02 billion and $2.65, respectively. In addition, it surpassed the EPS estimates in three of the trailing four quarters, which is promising.
SHW’s shares have gained 2.1% over the past three months to close the last trading session at $232.87.
SHW’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth, Sentiment, and Quality. In the 56-stock B-rated Home Improvements & Goods industry, it is ranked #12. To see additional POWR Ratings of SHW for Value, Momentum, and Stability, click here.
Frontdoor, Inc. (FTDR)
FTDR is a provider of customizable home service plans that help customers protect and maintain their homes and assets from expensive and unplanned breakdowns of home systems and appliances. The company operates under American Home Shield, HSA, OneGuard, and Landmark Home Warranty brand names.
On May 10, FTDR revealed that its app, Frontdoor, which offers comprehensive home maintenance and repair services, had garnered over 225,000 downloads within four weeks since its launch on April 11. This reflects the company’s robust demand from homeowners.
On April 26, FTDR announced a significant partnership termed “Feature Plus Level Partnership” with Home & Garden Television (HGTV) for the highly anticipated Smart Home Sweepstakes 2023. As part of this collaboration, promotional content showcasing the newly-introduced Frontdoor app would be extensively featured across HGTV’s digital platforms.
FTDR’s revenue increased 4.6% year-over-year to $367 million in the first quarter (ended March 31, 2023), while its gross profit rose 18.1% from the year-ago value to $170 million. The company’s adjusted net income and adjusted EPS amounted to $23 million and $0.29, up 666.7% and 625% from the prior-year period, respectively. Also, its adjusted EBITDA increased 116% from the year-ago value to $54 million.
Streets expect FTDR’s revenue and EPS for the second quarter (ending June 30, 2023) to increase 5.3% and 4.8% year-over-year to $512.73 million and $0.56, respectively. Moreover, it surpassed the revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 50.5% year-to-date to close the last trading session at $31.30.
FTDR’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Growth. Within the same B-rated industry, it is ranked #16. Click here to see the other ratings of FTDR for Value, Momentum, Stability, and Sentiment.
Steelcase Inc. (SCS)
SCS provides a comprehensive portfolio of furniture and architectural products designed to help customers create workplaces. Its furniture portfolio includes furniture systems, seating, storage, fixed and height-adjustable desks, benches, etc. In addition, its interior architectural products comprise full and partial-height walls and architectural pods.
On April 14, SCS paid a quarterly dividend of $0.10 per share to its shareholders. The company’s annual dividend of $0.40 translates to a 5.59% yield on the prevailing prices, while its four-year average dividend yield is 4.27%.
For the fourth quarter of fiscal year 2023, which ended February 24, 2023, SCS’ revenue increased 6.5% year-over-year to $801.70 million, while its gross profit rose 21.8% from the year-ago value to $239.20 million.
Its operating adjusted income improved by 532.8% from the year-ago value to $38.60 million. The company’s net income amounted to $15.70 million versus a net loss of $2.20 million in the same period last year, while its adjusted EPS increased significantly year-over-year to $0.19.
The consensus EPS estimate of $0.67 for the year fiscal (ending February 28, 2024) represents a 19.6% improvement year-over-year. The consensus revenue estimate of $3.24 billion for the current year represents a marginal increase from the same period last year.
The company has an excellent earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. The stock has gained marginally year-to-date to close the last trading session at $7.16.
It’s no surprise that SCS has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Value and a B for Growth. Out of 56 stocks in the same industry, it is ranked #13.
In addition to the POWR Ratings we stated above, we also have SCS ratings for Momentum, Stability, Sentiment, and Quality. Get all SCS ratings here.
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SHW shares were trading at $231.76 per share on Friday afternoon, down $1.11 (-0.48%). Year-to-date, SHW has declined -1.82%, versus a 9.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta’s profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. more…