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TheStreet Open House

9 Homebuilder Suppliers Riding the Rebound

Stock quotes in this article: MAS, USG, FAST, URI, AOX, OC, AWI, MHK, SWK

BOSTON ( TheStreet) -- A recovery in the new-home market has boosted homebuilders' prospects and driven up their share prices, so much so that it might be better to buy shares of its suppliers.

The dry wall, cabinet, tools and plumbing fixtures manufacturers that builders rely on have posted mixed results so far this year, but they remain relatively cheap in comparison to the homebuilders themselves, and their long-term prospects are particularly attractive.

That optimism is based on the relative affordability and pent-up demand for new homes after the market's bust, homeowners' long-postponed spending on home improvements, as well as a concurrent recovery in commercial building, which will give the product suppliers pricing leverage based on the widespread need for their products.

But the housing recovery is likely to be choppy, as economic growth was sluggish in the first half of 2012 and the unemployment rate has stayed above 8%. Still, record low interest rates, forecasted at an average 3.7% on a 30-year mortgage this year and 3.5% in 2013, should provide a long-term incentive for new homebuyers, and hence building products.

Barclay's Capital said in a research note Monday that "a surprising shortage of quality housing supply is likely to drive a dramatic, multi-year recovery in home prices. This scarcity of quality homes to buy could drive prices up 5% to 7.5% per year through 2015."

But it cautions that the rally in homebuilders' stocks "has driven valuations in the sector to uncomfortable levels. It appears that we have reached that point in the rally when investors are pricing in a 'best case' scenario."

But in a positive for suppliers, it adds that "building products demand will also benefit as rising home values give homeowners the confidence to undertake discretionary projects in 2013 and beyond."

Here are summaries of nine leading housing industry suppliers, arranged in inverse order of their share price appreciation this year:

9. Fastenal (FAST)

Company profile: Fastenal, with a market value of $13 billion, provides building industry and industrial customers with all types of fasteners such as nails and screws as well as general-purpose maintenance, repair, and operations items. It has more than 2,600 store and distribution locations.

Dividend Yield: 1.74%

Investor takeaway: Its shares are up 1% this year, including 12% in the past three months, and have a 10-year, average annual return of 20%. Analysts give its shares two "buy" ratings, nine "holds," and two "weak holds," according to a survey of analysts by S&P.

S&P has it rated "strong buy," with a $60 price target on its shares, which is a 39% premium to its current price and forecast that sales will increase 17% (after gaining 22% last year) and another 16% in 2013, tied to a general economic recovery. Its second-quarter earnings climbed 19% to 38 cents per share.

8. Stanley Black & Decker (SWK)

Company profile: Stanley, with a market value of $13 billion, is a manufacturer and distributor of hand tools, power tools and related accessories.

Dividend Yield: 2.5%

Investor takeaway: Its shares are up 14% this year, including 26% in the past three months, and have a three-year, average annual return of 25%. Analysts give its shares six "buy" ratings, six "buy/holds," and three "holds," according to a survey of analysts by S&P.

Its second-quarter earnings fell a disappointing 22%, which prompted the company to announce new cost-saving measures and lower its full-year guidance. S&P has it rated "buy," and says it is "well-positioned to gain market share in its three customer markets as the global economy recovers."

7. United Rentals (URI)

Company profile: United Rentals, with a market value of $3 billion, is the largest equipment rental company in the world, with over 500 rental locations in North America.

Investor takeaway: Its shares are up 23% this year, and have a three-year, average annual return of 51%. Analysts give its shares seven "buy" ratings, six "buy/holds," and two "holds," according to a survey of analysts by S&P.

S&P has a "strong buy" rating on its shares, with a $52 price target, which is a 45% premium to the current price. "We see revenues rising 50% in 2012, after a 17% increase in 2011, reflecting higher rates and improved utilization, along with revenues included from recently acquired RSC Holdings," say S&P analysts.

6. Owens Corning (OC)

Company profile: Owens Corning, with a market value of $4 billion, is a manufacturer of residential and commercial building materials including roofing and insulation.

Investor takeaway: Its shares are up 23% this year, including 28% in the past three months, and have a three-year, average annual return of 17%. Analysts give its shares eight "buy" ratings, seven "buy/holds," and one "hold," according to a survey of analysts by S&P. Its second-quarter profit dropped 50% to 32 cents per share as revenue fell.

5. Armstrong World Industries (AWI)

Company profile: Armstrong, with a market value of $3 billion, is a producer of flooring products and ceiling systems for use in the construction and renovation of commercial and residential buildings.

Investor takeaway: Its shares are up 28% this year and have a three-year, average annual return of 27%. Analysts give its shares three "buy" ratings and nine "holds," according to a survey of analysts by S&P.

S&P has it rated "hold," and says "the company saw volume declines across all businesses. We think demand will remain weak, given the economic uncertainties in Europe." Its second-quarter profit rose 10% to 70 cents per share.

4. Mohawk Industries (MHK)

Company profile: Mohawk, with a market value of $6 billion, is the second-largest U.S. carpet and rug maker. It also makes ceramic tile, laminate flooring, and other floor covering products sold to residential and commercial markets.

Investor takeaway: Its shares are up 36% this year, including 26% in the past three months, and have a three-year, average annual return of 18%. Analysts give its shares three "buy" ratings, one "buy/hold," eight "holds," one "weak hold," and one "sell," according to a survey of analysts by S&P.

Analysts' consensus estimate is for earnings of $3.62 per share this year, and growth of 25% to $4.53 per share next year. Second-quarter earnings rose 20% to $1.06 per share.

3. A.O. Smith (AOS)

Company profile: A.O. Smith, with a market value of $3 billion, is a manufacturer of water heating equipment and electric motors for the residential, commercial, and industrial markets.

Dividend Yield: 1.3%

Investor takeaway: Its shares are up 45% this year. Analysts give its shares five "buy" ratings, two "buy/holds," and seven "holds," according to a survey of analysts by S&P.

S&P has a "strong buy" rating and a $60 price target on its shares, which is a 2.6% premium to the current price. Analysts' consensus earnings estimate is for $2.90 per share this year, growing by 16% to $3.37 per share next year.

2. Masco (MAS)

Company profile: Masco, with a market value of $6 billion, is one of the world's largest housing products suppliers, with a product line that includes plumbing products, cabinets, paint, and windows, sold under the brand names Delta Faucet and Behr paint.

Dividend Yield: 1.85%

Investor takeaway: Its shares are up 54% this year, including 25% in the past three months, and have a three-year, average annual return of 9%. Analysts give its shares two "buy" rating, one "buy/hold," 14 "holds," and two "weak holds," according to a survey of analysts by S&P.

S&P, which has it rated "buy," says "we see its business starting to revive in coming periods, on global economic growth and its likely positive impact on home improvement and housing markets. We also think (its) repayment of $745 million of debt in July, and its recent amendment of debt covenants puts it in a better financial position."

1. USG (USG)

Company profile: USG, with a market value of $2.6 billion, is North America's largest maker of gypsum wallboard under the Sheetrock brand, as well as a manufacturer and distributor of ceilings and flooring.

Investor takeaway: Its shares are up 129% this year, including 42% in the past three months, and have a three-year, average annual return of 12%. Analysts give its shares four "buy" ratings, two "buy/holds," nine "holds" and two "weak holds," according to a survey of analysts by S&P.

Despite the huge share-price run-up, S&P has it rated "strong buy," and calls it undervalued since it has "solid long-term prospects," based on the improving industry outlook, a recent restructuring of its balance sheet. It hasn't posted a quarterly profit since September 2007 but has recently seen its losses narrow.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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