Building Materials Stocks Should Benefit From Hurricane Harvey… (9/01/17)
...but rental centers might take a hit.
By Teresa Rivas
While there's not much to like about a natural disaster like Hurricane Harvey, one obvious beneficiary is the building materials industry, given construction that it will take to recover.
However, not all companies in the sector will benefit equally, according to Stifel's John Baugh and his team, who take a look at the stocks and extrapolate from damage reports and patterns after past storms to determine which companies stand to gain the most.
They write that they expect Home Depot (HD) and Lowe's (LOW) to be the biggest winners, with the most immediate positive impact on traffic. After Hurricane Sandy, both saw an immediate benefit, and one that last four quarters (heavily weighed to the first two). Baugh writes that Home Depot saw a $550 million combined positive impact, while Lowe's saw a $219 million impact. He thinks Home Depot might be the best positioned, however, as it has more stores and can better serve demand as items start to sell out, but with both firms having about 8% of their store base in Texas, it could be closer to a tie.
Baugh writes that Owens Corning (OC) didn't see much of an impact from Sandy and any benefit it sees would come more from its insulation rather than its roofing business, which would have been a winner from a storm with very high winds.
Flooring companies like Mohawk (MHK) and Lumber Liquidators (LL) should see demand as flooding results in moldy, swollen and warped floors, and he expects both companies should benefit. That said, with more than a third of Mohawk's revenues come from overseas, he doesn't see the boost being able to move the need much there, while Lumber Liquidators should see a similar increase as it did with Sandy, with seven to nine stores benefitting.
USG (USG) and Eagle Materials (EXP) should be see wallboard demand from flooding, and neither company has much exposure to the Northeast, meaning that the impact from Harvey should be higher than it was from Sandy.
One industry that could be negatively affected could be rental companies like Aaron's (AAN), Conn's (CONN), and Rent-A-Center (RCII):
We wrote out thoughts on CONN earlier this week, but would add only a few stores of the 20 that were closed earlier this week are still closed as of Thursday afternoon. AAN and RCII are likely to both be negatively impacted from the storms of course due to lost sales during periods where the stores are going to be closed or inaccessible, but also likely experience situations where customers stop making payments either because the products were damaged or lost or due to the fact that many customers make their payments at the physical store locations. We note many customers have waivers on their contracts that absolve them from responsibility to make payments in the case of damaged goods, but the companies would still experience a write-off in that situation. Lastly, there are no real rebound impacts that we can decipher from previous natural disasters.