There’s a Bright Spot in Home Improvement

By Jim Royal

While the housing market may be as flat as it’s ever been, another key component of residential investment has been rising: home improvement. More owners are now willing to reinvest in their current residences rather than shell out money for a new home.

In January, the Buildfax Remodeling Index rose 22% year over year, to its highest January level since the index was founded in 2004. It was the 15^th straight month of increases, so there’s a clear trend playing out. The gain has been broad-based, with every U.S. region posting a year-over-year gain in January. Home remodeling spending is estimated to grow 9.1% in the first quarter.

Numbers like those continue to bode well for big-box home improvement retailers such asHome Depot (NYSE: HD  ) and Lowe’s (NYSE: LOW  ) , as well as more focused competitors such as Lumber Liquidators (NYSE: LL  ) . Maintenance and repairs account for about 40% of Home Depot’s sales. Home Depot just notched its first annual sales gain since the fiscal year ended January 2007, and Lowe’s just exceeded its pre-recession annual sales record. Seasonal hiring at Lowe’s is up 15% year over year, and my own channel checks at Home Depot (i.e., I shopped there last weekend) suggest that business is a lot more robust than it has been in recent months.

The emphasis on home improvement should help bolster the bottom line at Masco (NYSE:MAS  ) , which reported a net loss in the last three years and has seen operating profit fall for each of the past five years. Fortune Brands (NYSE: FO  ) might also see a bump. While sales at Fortune’s spirits division remained robust during the recession, its home and security division has seen sales dive 31% since their 2006 high. And there’s nothing like a good coat of paint to make things look new again, so expect paint players such as Sherwin-Williams (NYSE: SHW  ) , which has performed solidly during the tough times, to buck up.

Whether the stocks of these players follow suit is another question entirely. Home Depot, Lowe’s, Fortune, and Sherwin-Williams trade in the 19-20 P/E range, while the faster-growing Lumber Liquidators is priced at 25 times trailing earnings. Masco’s loss for the year makes its P/E meaningless.

So what’s the best play in the home improvement space? Let me know in the comments below.