Window and Door — June/July 2012
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Windows on Wall Street

From Lincoln International

The WD Stock Index continues to perform very well as compared to the overall U.S. equity markets, with gains of 20% as compared to 1.2% for the S&P 500 over the last 12 months. The S&P 500 dipped in May due to a variety of factors weighing on stocks, but the WD index remained flat during the same period. This is evidence that investors are focused on an anticipated recovery in residential construction activity, which is slowly improving in most regions already. Preliminary estimates from the U.S. Census Bureau indicate that housing starts increased 2.6% in April 2012 compared to the prior month. The housing starts figures represent a year-over-year increase of 29.9% while building permits are up 23.7% on the same basis. Another piece of good news for residential construction is that the National Association of Home Builders/Wells Fargo housing market index rose to 29 in May from 24 in April, the strongest reading since May 2007.

WD Stock Watch

As of May 18, 2012
Company
Current
Price ($)
*EV/
52 Week EBITDA
High Low
Builders FirstSource (BLDR) $2.66 $3.39 $1.01 nmf
Drew Industries Inc. (DW) 26.45 26.78 17.49 8.3x
Fortune Brands Inc. (FO) 18.89 19.20 11.05 15.5x
Home Depot Inc., The (HD) 44.47 45.50 28.13 9.2x
Huttig Building Products Inc. (HBPI) - 1.08 0.25 nmf
Lowe's Cos. Inc. (LOW) 26.88 27.57 18.07 8.1x
Masco Corp. (MAS) 12.45 15.03 6.60 15.4x
PGT Inc. (PGTI) 1.38 2.50 0.98 9.5x
PPG Industries Inc. (PPG) 90.86 97.81 66.43 7.8x
Quanex Building Products Corp. (NX) 17.32 21.62 10.01 10.3x
Stanley Black & Decker (SWK) 71.50 78.19 47.07 9.4x

The WD Stock Watch includes a select list of publicly-traded companies involved in the window and door industry. For *EV/EBITDA: EV (enterprise value) = Market value of stock plus debt outstanding minus cash, and EBITDA = Earnings before interest, taxes, depreciation and amortization. Data provided courtesy of Lincoln International.

WD Stock Index

Note: Local currency converted to USD using historical spot rates. The WD Stock Index consists of the above stocks weighted by market cap. Data provided courtesy of Lincoln International.

Contact Information: Jeffrey Corum, jcorum@lincolninternational.com, (312) 580-6282. Lincoln International specializes in merger and acquisition advisory services, private capital raising and restructuring advice on mid-market transactions. Lincoln International also provides fairness opinions, valuations and pension advisory services on a wide range of transaction sizes. With 12 offices in Asia, Europe and North America, Lincoln has strong knowledge and contacts in key global economies. The organization provides clients with senior-level attention, in-depth industry expertise and integrated resources. By being focused and independent, it serves its clients without conflicts of interest. More information can be obtained at www.lincolninternational.com.

The analysis above is for your information only and is not an offer to sell or a solicitation of an offer to buy, the securities or instruments mentioned or described in this report. The information has been obtained or derived from sources believed by us to be reliable, but we do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute our judgment as of this date and are subject to change without notice.

Market Snapshot – Remodeling

After two years of bouncing around a bottom, remodeling activity is expected to pick up later this year, according to the latest Leading Indicator of Remodeling Activity from Harvard University's Joint Center for Housing Studies. Stronger pending home sales and continuing low interest rates are expected to contribute to a 5.9% increase in annual spending. "Hopefully, we're finally moving beyond simple volatility in the home improvement spending numbers to a period of sustained growth," says Eric S. Belsky, the center's managing director. "Unusually mild weather this past winter in many parts of the country accelerated the pace of homebuilding and home improvement activity," adds Kermit Baker, director of the center's Remodeling Futures Program. "This may produce a brief pause in remodeling activity this quarter, but then a strengthening economy should provide a foundation for continued growth moving forward."

Green Homes – Differentiator in Market

Green homes enjoyed a 17% share of the new construction market in 2011, according to a recent report from McGraw-Hill Construction. It puts the value of those homes at about $17 billion. The researchers predict that by 2016, green homes will account 29% to 38% of the market and representing a potential $87 billion to $114 billion opportunity. Two of the key factors driving this growth are the fact that green homes are seen as having higher quality and that they save consumers money. "In the current residential market, there is an enormous need to differentiate your homes for consumers," says Harvey Bernstein, VP of industry insights and alliances at McGraw-Hill. "When builders are able to offer homes that not only are green, but also offer the combination of higher quality and better value, they have a major competitive edge over those building traditional homes."

Closing Thoughts – Demographic Need

"We need to build roughly 1.6 million units a year over the next decade to meet demographic demand for housing. Obviously, we are now well below that. We do believe we will see a fairly nice run in 2013 and beyond as we need to build those units." – Chris Varvares, senior managing director, Macroeconomic Advisers LLC.
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