Six Months In
Taking Stock and Looking Ahead to Remainder of Year
by Michael Collins
With the first six months of the year at an end, we maintain
our opinion that the market is generally in a recovery mode. Most of the
vital statistics that measure progress in the housing and remodeling market
are exhibiting a positive trend, albeit punctuated by sporadic declines.
We must be cautious even with seemingly positive data, though, such as
the recent drops in foreclosure activity. Unfortunately, this is more
a reflection of the tightening of legal requirements placed on lenders
that have slowed the foreclosure process, rather than an indication that
fewer households are in peril of foreclosure.
There are a number of significant challenges facing the door and window
industry as we enter the second half of the year that have found their
way into sales figures in the second quarter.
Challenges Still Abound
Many companies reported to us that their 2011 sales year got off to a
strong start in January and February. We are hearing from an increasing
number of companies that this positive trend reversed itself somewhat
in the second quarter. A number of companies have indicated that their
sales are now down on a year-over-year basis. In some cases, companies
have indicated that they will revise their full-year 2011 budget downward
as a result of this reversal in trend.
One important challenge facing the industry at this point is rising materials
and input prices. The price of both oil and aluminum has doubled since
2009. This has led to an increase in key inputs, notably vinyl resins
and hardware. With oil prices up, shipping alone can drive higher input
costs. India and China are resuming their prior growth levels and major
portions of Japan needing to be rebuilt, indicating that commodity price
increases are likely to be part of the landscape for the foreseeable future.
Indeed, most of the door and window manufacturers with whom we are in
touch have reported that their key suppliers have hit them with price
increases in the last several months. Even manufacturers with highly differentiated
products that command a premium in the market find it difficult to pass
along one hundred percent of materials price increases immediately. Rather,
manufacturers must find ways to reduce and control other costs while phasing
in needed price increases over time.
of companies have indicated that their sales are now down on a year-over-year
Positives for the Second Half
The general level of stock prices is viewed as a leading economic indicator
that is predictive of the state of the economy roughly six months into
the future. In that regard, the current picture looks good. In the 12
months following May 2010, the Dow Jones Industrial Average rose roughly
20 percent. Interest rates have drifted modestly lower over the course
of the last year, which helps keep financing costs low. The problem for
door and window manufacturers is that most typical consumers donít make
remodeling or new construction decisions based upon the wealth effect
of changes in the value of their investment portfolios. In the past, the
decision to remodel a home was largely a function of the availability
of a home equity line of credit. In todayís market, the value of the family
home has often declined so much that all of the equity in the home has
been wiped out. In the current market, we believe that families make such
decisions based upon their internal assessment of the likelihood of keeping
Unemployment has dropped only slightly between May 2010 and May 2011 and
stands at roughly 9 percent. The housing market is still sending mixed
signals from month to month and the employment picture is uncertain but
stabilizing. Thus, many homeowners will likely defer large decisions like
remodeling or building new homes until they have greater visibility on
their own employment outlook. Once jobless claims begin to show steady
and sustained drops, we are likely to witness once again the power of
the U.S. consumer base feeling confident enough to spend money. y
Michael Collins is a Chicago-based investment banker with a specialized
merger and acquisition practice in the door and window industry. His opinions
are solely his own and not necessarily those of this magazine.
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