Expectations of falling mortgage rates, the rise in existing home sales in November, and the Fed’s expected interest rate cuts this year are expected to boost demand for home improvement companies. However, home prices remain elevated, and the unavailability of homes means homeowners are likely to opt for remodeling and renovation services, benefiting home improvement companies.
Amid this backdrop, investors could consider buying fundamentally strong home improvement companies La-Z-Boy Incorporated (LZB), Hooker Furnishings Corporation (HOFT), and Hamilton Beach Brands Holding Company (HBB) for potential new year gains.
Before diving deeper into the fundamentals of these stocks, let’s discuss the industry landscape and the factors driving its growth.
Home improvement was one of the major themes during the pandemic as people were flush with money and were willing to spend it on improving their homes as they were mostly stuck indoors. The home improvement sector remains well-placed for growth due to rising disposable incomes, growth of DIY projects, aging housing stock, and shift to rural and suburban locations.
Last year was difficult for the home improvement industry due to the unavailability of homes, high mortgage rates, near-record high home prices, fewer existing home sales, slowing wage growth, inflationary pressures etc. However, 2024 is expected to be better for the home improvement industry.
Existing-home sales in November rose 0.8% from October to reach 3.80 million at a seasonally adjusted annual rate, marking the first rise after five months of declines. Mortgage rates have also been falling lately, with BankRate expecting rates to reach 5.75% by the end of 2024. Falling mortgage rates and easing inflation would not only spur home buying but also fuel the need to make home improvements and repairs.
BankRate’s Chief Financial Analyst Greg McBride said, “Mortgage rates will spend the bulk of the year in the 6s, with movement below 6 percent confined to the back half of the year.” NAR predicts 4.71 million existing home sales in 2024, up 13.5% from 4.1 million in 2023.
The worldwide home improvement services market is anticipated to grow at a CAGR of more than 5% to reach $423.9 billion in 2027. Also, there is increased interest in DIY projects. The global do-it-yourself (DIY) home improvement retailing market is anticipated to grow at a CAGR of 4.4% to reach $1.28 trillion by 2030.
In light of such encouraging trends, let us dive deeper into the fundamentals of the Home Improvement & Goods industry’s picks, starting with number three.
Stock #3: La-Z-Boy Incorporated (LZB)
LZB manufactures, markets, imports, exports, distributes, and retails upholstery furniture products, accessories, and casegoods furniture products worldwide. It operates through Wholesale, Retail, Corporate, and other segments. The company sells recliners and motion furniture, sofas, sectionals, ottomans, chairs, upholstered furniture, casegoods, reclining chairs.
In terms of the trailing-12-month gross profit margin, LZB’s 45.14% is 27.3% higher than the industry average of 35.47%. Its 5.68% trailing-12-month net income margin is 26.8% higher than the industry average of 4.48%. Likewise, its 6.42% trailing-12-month Return on Total Assets is 60.8% higher than the 4% industry average.
LZB’s sales for the second quarter ended October 28, 2023, amounted to $511.44 million. The company’s non-GAAP operating income came in at $40.51 million. Its non-GAAP net income attributable to LZB and EPS stood at $32.27 million and $0.74, respectively.
Additionally, its total cash, cash equivalents and restricted cash increased 60.4% year-over-year to $333.47 million.
Analysts expect LZB’s revenue and EPS for the quarter ending July 31, 2024, to increase 2.5% and 3.2% year-over-year to $493.54 million and $0.64, respectively. It surpassed EPS estimates in each of the trailing four quarters, which is impressive. Over the past year, the stock has gained 60.1% to close the last trading session at $36.92.
LZB’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the B-rated Home Improvement & Goods industry, it is ranked #16 out of 57 stocks. It has a B grade for Momentum and Quality. Click here to access all the ratings of LZB for Growth, Value, Stability, and Sentiment.
Stock #2: Hooker Furnishings Corporation (HOFT)
HOFT designs, manufactures, imports, and markets residential household, hospitality, and contract furniture. It operates under the segments – Hooker Branded, Home Meridian, and Domestic Upholstery. The company sells home furnishings products through retailers, such as independent furniture stores, department stores, mass merchants, national chains, interior designers, and e-commerce retailers.
In terms of the trailing-12-month levered FCF margin, HOFT’s 18.16% is 245.7% higher than the 5.25% industry average. Likewise, its 1.24x trailing-12-month asset turnover ratio is 24.7% higher than the industry average of 0.99x.
For the fiscal third quarter ended October 29, 2023, HOFT’s net sales amounted to $116.83 million. Its gross profit increased 5.3% year-over-year to $33.71 million. The company’s operating income rose 36.6% over the prior year quarter to $8.77 million. Its net income increased 45.4% year-over-year to $7.04 million. Also, its EPS came in at $0.65, representing an increase of 54.8% year-over-year.
Street expects HOFT’s revenue for the quarter ending April 30, 2024, to increase 5.5% year-over-year to $128.47 million. Its EPS for the quarter ending January 31, 2024, is expected to increase considerably year-over-year to $0.60. Over the past month, the stock has gained 49.7% to close its last trading session at $26.08.
HOFT’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth, Momentum, and Sentiment. It is ranked #12 out of 57 stocks in the same industry. To access the additional ratings of HOFT for Value, Stability, and Quality, click here.
Stock #1: Hamilton Beach Brands Holding Company (HBB)
HBB designs, markets, and distributes small electric household and specialty housewares appliances globally. It offers air fryers, blenders, air purifiers, consumer and commercial products, countertop appliances, water filtration systems, garment care products, injection care management systems, farm-to-table and field-to-table food processing equipment, cocktail delivery systems, etc., under various brands.
In terms of the trailing-12-month levered FCF margin, HBB’s 16.43% is 212.8% higher than the 5.25% industry average. Likewise, its 1.55x trailing-12-month asset turnover ratio is 55.6% higher than the industry average of 0.99x.
HBB’s revenue for the fiscal third quarter ended September 30, 2023, increased 1.9% year-over-year to $153.61 million. Its gross profit increased 15% over the prior year quarter to $40.07 million. The company’s net income increased 75% year-over-year to $10.34 million. Also, its EPS came in at $0.74, representing an increase of 72.1% year-over-year.
For fiscal 2024, HBB’s revenue is expected to increase 1.5% year-over-year to $647.90 million. Over the past nine months, the stock has gained 76.7% to close the last trading session at $17.49.
It’s no surprise that HBB has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.
It has an A grade for Value and a B for Growth and Sentiment. It is ranked #5 out of 57 in the Home Improvement & Goods industry. In addition to the POWR Ratings highlighted above, you can see HBB’s ratings for Momentum, Stability, and Quality here.
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LZB shares were trading at $36.85 per share on Tuesday afternoon, down $0.07 (-0.19%). Year-to-date, LZB has declined -0.19%, versus a -0.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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