Rise in Residential Investment May Help Home Depot-Lowe’s

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Americans Victor J. Blue/Bloomberg A customer pushes a cart carrying building materials at a Home Depot Inc. store in the Brooklyn borough of New York. A customer pushes a cart carrying building materials at a Home Depot Inc. store in the Brooklyn borough of New York. Photographer: Victor J. Blue/Bloomberg Enlarge image Uploaded

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Uploaded Victor J. Blue/Bloomberg An employee helps a shopper looking at light fixtures at a Lowe’s Cos. store in the Brooklyn borough of New York. An employee helps a shopper looking at light fixtures at a Lowe’s Cos. store in the Brooklyn borough of New York. Photographer: Victor J. Blue/Bloomberg Spending on construction of new residential housing and improvements to existing homes is at a three-year high, a trend that may boost sales at Home Depot Inc. (HD) and Lowe’s Cos. (LOW) Private-residential fixed investment, which includes major replacements such as new roofs and improvements like finishing a basement, rose 9.1 percent from a year earlier to an annualized $360.7 billion for the three months ended March 31. This marks the fourth consecutive quarter of nominal increases and was the fastest pace of yearly growth since 2006, Bureau of Economic Analysis data show. These expenditures may prolong a structure’s life or increase its value and are “another piece of corroborating evidence” that home-related purchases were “very good” in the first quarter, said Scot Ciccarelli, a New York-based analyst at RBC Capital Markets. New U.S. homes sold at a 328,000 annual rate in March, beating the 319,000 median estimate of economists surveyed by Bloomberg News. The total was down from an upwardly revised 353,000 pace the prior month that was the highest in two years, based on Commerce Department data. Residential building permits also climbed unexpectedly by 4.5 percent to a 747,000 annual rate in March, the highest since September 2008. Economists surveyed by Bloomberg predicted a 710,000 pace. Private-residential spending — which accounts for about 2.3 percent of gross domestic product — is highly correlated with comparable-store sales for Home Depot and Lowe’s, the two largest U.S. home-improvement retailers, Ciccarelli said.

Rising Sales

Same-store sales probably rose at least 5 percent in the fiscal first quarter at Home Depot and at least 2.4 percent at Lowe’s from a year earlier, he forecasts. Atlanta-based Home Depot is scheduled to release earnings on May 15, followed on May 21 by Lowe’s, based in Mooresville, North Carolina. Home Depot reported an increase at stores opened at least a year of 5.7 percent for the three months ended Jan. 29; Lowe’s said sales rose 3.4 percent for the three months ended Feb. 3. About 30 percent of Fortune Brands Home Security Inc. (FBHS)’s North American sales are at Home Depot, Lowe’s and home- improvement chain Menard Inc., Chief Executive Officer Christopher Klein said in a telephone interview. The Deerfield, Illinois-based company, which owns the Moen faucet and Omega cabinet brands, is projecting a 4 percent increase in 2012 revenue for its repair and remodel business, up from a previous estimate of 2 percent, he said.

Signs of Comeback

As the housing industry shows signs of a comeback, the Standard Poor’s 500 Home Improvement Retail Index, comprised of Home Depot and Lowe’s, has risen 73 percent since Aug. 10, 2011, compared with the SP 500’s 21 percent gain. Shares of the two companies have outpaced the market in the past nine months as investors try to gauge how much recent revenue increases reflect “stronger forward-looking demand” and not moderate weather, said Ciccarelli, who maintains “outperform” recommendations on these retailers. Their valuations already may reflect improvement in housing, Ciccarelli said. Home Depot …..

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