Buy, Hold, or Sell? Analyzing 4 Home Improvement Stocks

The home improvement industry’s prospects look promising due to falling mortgage rates, the Federal Reserve’s indication of interest rate cuts, rising disposable incomes, growing work-from-home trends, emphasis on sustainability, smart home integration and the rising popularity of DIY projects.

Despite the promising prospects of the home improvement industry, only some stocks are expected to perform well. Hence, it could be wise to avoid LL Flooring Holdings, Inc. (LL), given its poor fundamentals and growth prospects. Meanwhile, investors should wait for a better entry point in Armstrong World Industries, Inc. (AWI).

On the other hand, given their promising growth prospects and robust fundamentals, one could consider buying Sherwin-Williams Company (SHW) and Hamilton Beach Brands Holding Company (HBB).

Before diving deeper into the fundamentals of these stocks, let’s understand what’s driving the industry’s prospects.

The home improvement industry encountered several challenges last year, such as high home prices and mortgage rates, high inflation, the lack of supply of homes, fewer existing home sales, and slowing wage growth. Sales of existing homes last year totaled 4.09 million, falling to a nearly 30-year low.

Existing home sales in December fell 1% to a seasonally adjusted annual rate of 3.78 million and declined 6.2% over the previous year. However, mortgage rates have been easing since November, closely following the fall in the 10-year Treasury yield.

According to many economists, mortgage rates are expected to continue their downward trend, and this should help boost demand for home buying going into the spring homebuying season, which begins in late February.

NAR Chief Economist Lawrence Yun said, “The latest month’s sales look to be the bottom before inevitably turning higher in the new year. Mortgage rates are meaningfully lower compared to just two months ago, and more inventory is expected to appear on the market in upcoming months.”

Falling mortgage rates and easing inflation would not only spur home buying but also fuel the need to make home improvements and repairs. Apart from the falling mortgage rates, the home improvement sector will likely benefit from e-commerce, a wide range of product options to choose from, smart home integration and growing 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. Furthermore, the home improvement market revenue is predicted to grow at a CAGR of 6.7% to reach $575.50 billion by 2030.

Considering these trends, let’s examine the fundamentals of four Home Improvement & Goods stocks mentioned above.

Stocks to Buy:

The Sherwin-Williams Company (SHW)

SHW engages in manufacturing, distributing, and selling paints, coatings, and related products to professional, industrial, commercial, and retail customers. It operates through three segments: The Americas Group, Consumer Brands Group, and Performance Coatings Group.

In terms of the trailing-12-month EBIT margin, SHW’s 15.52% is 35.6% higher than the 11.45% industry average. Likewise, its 10.09% trailing-12-month levered FCF margin is 145.1% higher than the industry average of 4.12%. Furthermore, the stock’s 14.55% trailing-12-month Return on Total Capital is 165% higher than the industry average of 5.49%.

For the fiscal third quarter, which ended September 30, 2023, SHW’s net sales increased 1.1% year-over-year to $6.12 billion. Its net income grew 11.2% over the prior-year quarter to $761.50 million. The company’s adjusted EBITDA increased 12.6% year-over-year to $1.27 billion. Also, its adjusted net income per share came in at $3.20, registering an increase of 13.1% year-over-year.

Street expects SHW’s revenue and EPS for the quarter ending March 31, 2024, to increase marginally and 7.9% year-over-year to $5.44 billion and $2.20, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 31.6% to close the last trading session at $307.48.

SHW’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. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It has an A grade for Quality and a B for Sentiment. Within the 59 stocks in the Home Improvement & Goods industry, it is ranked #18. Click here to see SHW’s additional ratings for Growth, Value, Momentum, and Stability.

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, coffee makers, irons, juicers, mixers, etc. It provides air purifiers under the Clorox and TrueAir brands, consumer products under the Hamilton Beach and Proctor Silex brands, and commercial products for restaurants, bars, etc.

In terms of the trailing-12-month levered FCF margin, HBB’s 16.43% is 207.9% higher than the 5.34% industry average. Likewise, its 1.55x trailing-12-month asset turnover ratio is 56.5% 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 95.8% to close the last trading session at $18.95.

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 in the same industry. In addition to the ratings highlighted above, you can see HBB’s ratings for Momentum, Stability, and Quality here.

Stock to Hold:

Stock #3: Armstrong World Industries, Inc. (AWI)

AWI designs, manufactures, and sells ceiling and wall systems in the United States, Canada, and Latin America. It operates through Mineral Fiber and Architectural Specialties segments. The company offers suspended mineral fiber, soft fiber, fiberglass wool, and metal ceiling systems, ceiling component products, ceilings and walls for use in commercial settings, and façade and partition products.

On July 24, 2023, AWI announced that it has acquired BŌK Modern, a leader in integrated architectural metal systems, aiming to enhance its metal category and design capabilities. The acquisition aligns with AWI's strategy to innovate and efficiently deliver customers' design intent while fostering growth in the metal solutions sector.

In terms of the trailing-12-month gross profit margin, AWI’s 37.98% is 24.9% higher than the 30.42% industry average. Likewise, its 26.52% trailing-12-month EBITDA margin is 93.3% higher than the industry average of 13.72%.

On the other hand, the stock’s 0.75x trailing-12-month asset turnover ratio is 7.8% lower than the industry average of 0.81x.

AWI’s net sales for the third quarter ended September 30, 2023, increased 6.9% year-over-year to $347.30 million. Its adjusted operating incomes increased 22.9% over the prior-year quarter to $102 million. The company’s adjusted EBITDA increased 19% year-over-year to $125 million.

In addition, its adjusted net earnings rose 12.7% year-over-year to $71 million. Also, its adjusted net EPS came in at $1.60, representing an increase of 17.6% year-over-year.

AWI’s revenue for the quarter ended December 31, 2023, is expected to increase 0.3% year-over-year to $305.53 million. Its EPS for the same quarter is expected to decline 4.2% year-over-year to $1.04. It surpassed the Street EPS estimates in three of the trailing four quarters, which is impressive. Over the past three months, the stock has gained 44.3% to close the last trading session at $100.64.

AWI’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, which translates to Neutral in our proprietary rating system.

Within the same industry, it is ranked #22. It has a C grade for Growth, Stability, and Sentiment. We have also given AWI grades for Value, Momentum, and Quality. Get all the AWI ratings here.

Stock to Avoid:

LL Flooring Holdings, Inc. (LL)

LL operates as a multi-channel specialty retailer of hard-surface flooring and hard-surface flooring enhancements and accessories. The company offers hard-surface flooring, including waterproof hybrid resilient, waterproof vinyl plank, engineered hardwood, laminate, bamboo, porcelain tile, and flooring enhancements and accessories under the Bellawood and Coreluxe brand names.

LL’s negative 6.9% trailing-12-month EBITDA margin compares to the 10.98% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 45.31% compared to the 11.65% industry average. Furthermore, the stock’s negative 17.69% trailing-12-month Return on Total Assets compares to the industry average of 4.05%.

For the fiscal third quarter, which ended September 30, 2023, LL’s total net sales decreased 19.7% year-over-year to $215.85 million. Its adjusted gross profit declined 15.4% year-over-year to $80.86 million. The company’s adjusted operating loss widened 301.6% over the prior-year quarter to $$17.11 million. In addition, its adjusted net loss widened 481% year-over-year to $22.57 million.

Also, its adjusted loss per share came in at $0.78, widening 457.1% year-over-year.

Analysts expect LL’s revenue for the quarter ended December 31, 2023, to decrease 19.5% year-over-year to $212.50 million. Its EPS for the same quarter is expected to remain negative. It failed to surpass the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has declined 50.9% to close the last trading session at $2.86.

LL’s weak fundamentals are reflected in its POWR Ratings. It has an overall D rating, equating to a Sell in our proprietary rating system.

It is ranked last out of 59 stocks in the same industry. It has an F grade for Growth and a D for Stability and Quality. To see more of LL’s ratings for Value, Momentum, and Sentiment, click here.

What To Do Next?

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SHW shares were trading at $305.83 per share on Tuesday afternoon, down $1.65 (-0.54%). Year-to-date, SHW has declined -1.95%, versus a 1.67% rise in the benchmark S&P 500 index during the same period.

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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