Volume 13, Issue 7 - September 2012

TrendTracker

Consumer Purchases
What Do Other Buys Mean for Windows?
by Michael Collins
mcollins@jordanknauff.com

Most door and window manufacturers report that the commercial segment of their business is performing quite well. Non-bank corporations in the United States are holding an estimated $1 trillion in cash. Clearly, as the economy improves, these companies will be more than capable of investing in buildings and improvements. The question facing many companies is the residential side of their business. When will the pent-up demand in the residential segment of our industry begin to more fully express itself?

Housing numbers and employment figures continue to flicker back and forth each month or so. A statistic that painted a dire picture one month turns positive the following month. This is always to be expected in an economy as large as ours. We often refer to the U.S. economy as being similar to steering an aircraft carrier—changes in course take a long time and are often difficult to perceive. There are, however, ways of checking in on the health of the consumer that have bearing on the door and window industry.

What are We Buying?
Automobile purchases are similar to remodeling and construction projects in that they typically are planned out carefully and are dependent on obtaining financing. They are also among the largest of non-housing expenditures made by consumers. In June, the auto industry’s seasonally adjusted annual selling rate was 14.1 million vehicles. The first six months of this year saw 7.3 million vehicles sold, nearly 15 percent more than in the first half of 2011. The ability of the U.S. consumer to drive such an increase in auto sales bodes very well for the building products industry. Individuals worried about losing their job or not having enough money to pay their bills do not rush out to buy new cars, doors or windows.

Other measures of consumer spending, such as consumer confidence levels, have recently sent signals that indicate a cautious consumer and one who is unwilling to spend money. In the face of that conflicting evidence, how can a door or window manufacturer form a meaningful picture of the recovery of the residential sector? The financial markets provide us with another predictor of consumer behavior in the form of the stock market. The stock market typically is seen as a leading indicator that shows us what the performance of a company will be six months in the future. By looking at the performance of the shares of companies that are dedicated to consumer products, we are able to glean how the market thinks earnings—which are driven by consumer spending—will look two quarters from now.

Whose Stock is Rising?
Starting with fairly large ticket items, such as home appliances, we should look at the performance of Whirlpool Corp. (NYSE: WHR). Shares of this company, which is heavily reliant upon a consumer willing to spend money, rose just over 40 percent in 2012 through the end of July. Appliances are a meaningful proxy for remodeling expenditures because they, too, are often driven by a desire to upgrade and improve. Just as doors and windows that get replaced are typically not broken, washers, dryers and stoves have seldom completely ceased to perform when they are replaced. Turning to another company whose sales are driven by consumer “wants” rather than “needs,” we should look at Apple Inc. (NASDAQ: AAPL). Shares in this company, whose non-computer products have captured tremendous attention and wallet share among consumers, also rose just over 40 percent through July. The Home Depot Inc. (NYSE: HD) is an excellent barometer of the DIY market and has experienced share price appreciation just shy of 25 percent in the first seven months of 2012. Shares of Expedia Inc. (NASDAQ: EXPE), which should be viewed as primarily an indicator of the health of consumers and secondarily of business spending on travel, rose a whopping 85 percent through the first seven months of the year.

The fact is that Amazon.com, eBay, Marriott and a host of other companies whose earnings are driven by consumer spending, have seen strong share price appreciation so far this year. The perceived value of these important companies would not have seen such strong growth this year if it were not for the U.S. consumer continuing to spend and fuel the recovering economy. Since savings rates have improved, this spending is real and is not driven solely by unsustainable increases in credit card debt. In the quarters ahead, proactive participants in the door and window industry should also find themselves the beneficiaries of the consumer’s willingness to spend.

Michael Collins is an investment banker and a partner of Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.


DWM

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