Sherwin Williams announced last week, in what is known as a "pre-announcement," that their first quarter earnings per share would be in the $.92 to $.95 range, versus the previous guidance of $.56 to $.74 and the consensus estimate of $.72. The devil is usually in the details, but in this case the details were anything but devilish. Of note was the strength in the company's sales of interior paints, since market prognosticators had been attributing strength in the sector to the early arrival of warmer weather. The higher temperatures may have just moved some construction or remodeling projects to earlier dates on the calendar, not affecting the overall level of activity. Baby, it's warm outside (to misquote Dean Martin), but conditions inside are always favorable to putting on a fresh coat of paint (unless your wife is stingy with the thermostat).
The housing sector, of course, has been a source of both concern and consternation for investors since the crisis began, so we might consider whether housing is stirring again, like those daffodils that were coaxed into bloom by an early breeze of local, if not global, warming. First, we need to distinguish that home sales, new construction, and home improvement numbers do not always move together, or at least not to the same extent. What the numbers seem to be telling us is that the strength, for now, is in the home improvement area, as consumers feel more confident in the economic outlook and, accordingly, are willing to spend some money to spruce up their environs. As every homeowner knows, whether the dwelling in question is a bungalow or a Mcmansion, there is always something that needs to be done. As I look around my own money pit, I can just feel the dollars draining out of my bank account. Homeowners who felt they had to watch the paint peel until conditions improved may well be bringing some pent-up demand to the market for everything from paint to hammers.
As I have mentioned here before, one way to play this trend is with those companies that will benefit when we see more robust construction activity, but can still do good business otherwise. A case in point would be Stanley Black and Decker (SWK, $72), the maker of hand and power tools, security systems, and various industrial products. The old Stanley Works corporation merged with Black and Decker in 2010, and the company purchased the Niscayah Group, a European security systems provider, in September of 2011. SWK is focusing on opportunities in emerging markets, especially in Latin America and Asia. When construction activity picks up both domestically and globally, the company should be well positioned to reap the rewards, given the cost synergies it stands to realize through its acquisitions. SWK sells many of its trademark black and yellow tools through Home Depot and Lowe's, two companies that also seem to be benefiting from increased consumer expenditures on fixing-up.
As for a genuine recovery in new home construction, the data remain mixed, but on balance encouraging. Tuesday's report showed March housing starts down 5.8% and below expectations, but permits were up 4.5% and ahead of forecasts. Personal balance sheets suffered major damage during the recession, and the de-leveraging process always takes time to work through. The foreclosure situation has resulted in more homes being on the market, and this has been a classic case of supply/demand imbalance. At some point--who knows exactly when--that imbalance will shift in the other direction, once that excess supply is worked off. One key ingredient is the depressed rate of household formation, which is dependent on an improvement in the employment picture. The consensus among analysts seems to be that we are going through a bottoming of the housing cycle, but such a bottom does not necessarily suggest an imminent upturn.
Monitoring the Radar Screen
Market prognosticators have been falling all over themselves trying to come up with explanations for the recent drop in the stock of Apple (AAPL, $609). The best explanation may be the simplest one, which is profit-taking after the tremendous move so far this year. The stock started 2012 at $405 and hit a high of $644 earlier this month. What was notable about Monday's market activity was that a number of growth stocks that have had major gains this year sold off in trading where the Dow Jones was actually up. On Tuesday, AAPL rose $29.57 to close at $609.70, and the company reports earnings on April 24th. Raymond James just started coverage of AAPL with a price target of $800.
Intuitive Surgical (ISRG, $545) is up about $30 in after-hours trading Tuesday after reporting another outstanding quarter, with earnings per share coming in at $3.50 versus a consensus estimate of $3.14; revenues were also well ahead of forecasts. IBM, Intel, and Yahoo also reported above-consensus earnings after the close, so we'll be watching Wednesday to see if this sets a positive tone for the technology sector and the overall market.
Another eye-catching earnings report came from United Rentals (URI, $41), which clocked in with first quarter earnings of $0.17 per share versus an estimate of $0.05 and a year earlier loss. The company rents all sorts of equipment used in construction and appears to be riding a wave of preference for renting over purchasing such heavy equipment in an uncertain economy.
Life is short. Get busy.
Jim
Disclosure/Disclaimer: My family members and/or I own shares of SWK, AAPL, and ISRG. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as investment advice or the recommendation to buy or sell any security.
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