Masco, Fortune Brands Gains on Signs of Home Improvement Recovery

NEW YORK (TheStreet) -- Lowe's (LOW) was falling in Wednesday trading after missing third-quarter earnings and taking rival Home Depot (HD) with it, but their respective revenue growth and same-store sales increases have inspired confidence that the industry may be poised for a turnaround.

While Lowe's was tumbling 4.1% to $48.27, home renovation suppliers Masco Corporation (MAS), Fortune Brands (FBHS) and Headwaters (HW) were rallying on the view that demand for their product is increasing. Shares of Home Depot were slipping 0.4% to $80.17.

Industry leaders Masco Corporation and Fortune Brands, which both manufacture construction supplies and fixtures, gained 3.8% to $21.84 and 2.1% to $42.78, respectively. Small-cap competitor Headwaters was up 2.9% to $8.99.

The home improvement industry has been buffeted by macroeconomic headwinds after the housing market crashed during the U.S. economic downturn. Over the third quarter, Lowe's and Home Depot reported a 6.2% and 7.4% increase in same-store sales, respectively, indicating a market recovery is well underway.

TheStreet Ratings team rates Masco Corp as a Buy with a ratings score of B-. The team has this to say about their recommendation:

"We rate Masco Corp (MAS) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, good cash flow from operations, impressive record of earnings per share growth and compelling growth in net income. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MAS's revenue growth has slightly outpaced the industry average of 7.8%. Since the same quarter one year prior, revenues rose by 12.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Masco Corp reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, Masco Corp continued to lose money by earning -19 cents a share vs. -$1.34 a share in the prior year. This year, the market expects an improvement in earnings (79 cents versus -19 cents).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Building Products industry. The net income increased by 586.7% when compared to the same quarter one year prior, rising from $15 million to $103 million.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Building Products industry and the overall market, Masco Corp's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly increased by 209.57% to $291 million when compared to the same quarter last year. In addition, Masco Corp has also vastly surpassed the industry average cash flow growth rate of 53.86%.

TheStreet Ratings team rates Fortune Brands Home & Security as a Buy with a ratings score of B-. The team has this to say about their recommendation:

"We rate Fortune Brands Home & Security (FBHS) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, good cash flow from operations and solid stock price performance. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 7.8%. Since the same quarter one year prior, revenues rose by 23.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Fortune Brands Home & Security reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, Fortune Brands Home & Security turned its bottom line around by earning 72 cents a share vs. -45 cents a share in the prior year. This year, the market expects an improvement in earnings ($1.50 vs. 72 cents).
  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Building Products industry average. The net income increased by 60.5% when compared to the same quarter one year prior, rising from $40 million to $64.2 million.
  • Net operating cash flow has significantly increased by 79.82% to $120.3 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 54.02%.
  • Powered by its strong earnings growth of 54.16% and other important driving factors, this stock has surged by 54.36% over the past year, outperforming the rise in the S&P 500 Index during the same period. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.

TheStreet Ratings team rates Headwaters Inc as a Hold with a ratings score of C-. The team has this to say about their recommendation:

"We rate Headwaters Inc (HW) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including poor profit margins and generally higher debt management risk."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 9.3%. Since the same quarter one year prior, revenues rose by 13.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Powered by its strong earnings growth of 260% and other important driving factors, this stock has surged by 43.52% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • The debt-to-equity ratio is very high at 5.41 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Even though the debt-to-equity ratio is weak, HW's quick ratio is somewhat strong at 1.25, demonstrating the ability to handle short-term liquidity needs.
  • The gross profit margin for Headwaters Inc is currently lower than what is desirable, coming in at 27.74%. It has decreased from the same quarter the previous year. Regardless of the weak results of the gross profit margin, the net profit margin of 4.76% is above that of the industry average.

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