Moving Into the Housing Recovery

 | Jul 26, 2013 | 12:30 PM EDT
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Despite the run-up in interest rates over the last few months that has seen 30-year mortgage rates shoot up a full percentage point, new home sales came in at just below 500,000 for the month of June. This is the highest level since May 2008.

The housing recovery is impacting building suppliers is a very positive fashion. To cite but one example, Mexico's largest cement manufacturer, Cemex (CX), just reported that earnings before interest, taxes, depreciation and amortization (EBITDA) from its U.S. operations tripled year-over-year in its just completed quarter.

Given the pent-up demand for housing that has accumulated over the past few years because of the financial crisis, the housing market should remain robust for several years -- barring a slippage into another recession. This will provide a solid tailwind to firms that provide the materials that go into new housing construction. Here are two that are well positioned long term to move higher on this demand.

Louisiana Pacific (LPX) is a leading manufacturer of quality engineered wood. It is the market leader in producing oriented strand board (OSB) that has been replacing plywood for use in housing construction. The company had a near death experience during the depths of the financial crisis as its stock sunk below $2 a share at the market nadir in March 2009. LPX has since recovered and is now trading above $16 a share; however, it is still priced at only around 60% of its pre-crisis peak.

The company posted its first profit in five years in 2012 but is on track to post more than 1.30 a share in profits this year on a better than a 20% revenue increase. The firm posted about $4 a share in earnings when the housing market was robust in 2004 and 2005. Louisiana Pacific still has idle capacity, which will gradually come online as housing starts continue to rebound, boosting utilization and profits. Finally, OSB is just starting to be used in the $10 billion annual siding market where it has an 80% share in this growing sub-sector.

Ply Gem Holdings (PGEM) makes customized fencing, windows, doors and other home exterior products used in residential and commercial construction. Some of its key distributers include Home Depot (HD) and Lowe's (LOW). The company came public in May and is selling approximately 20% below its opening IPO price. Ply Gem is expected to post annual revenue growth of better of 25% for both fiscal 2013 and fiscal 2014. Given this growth, the stock is not expensive as it is trading around 13x next year's projected earnings.

The company's products are almost completely tied to new construction and home remodeling. Both of these areas are expected to be strong at least through 2016, so PGEM is a good proxy to play the continuing housing rebound. Finally, the company has completely re-engineered its operations during the downtown. This year, Ply Gem is on track to post approximately the same revenues as in 2007 -- with half of its previous workforce -- so his should lead to better margins.

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