Leveraging A Recovery In Home Improvement

By Kristina Zucchi, CFA | March 04, 2010 AAA

The economy's housing and home improvement segment seems to be on the cusp of a turnaround. Housing manufacturers such as Toll Brothers (NYSE: TOL) and do-it-yourself companies like Home Depot (NYSE: HD) are the obvious beneficiaries of a housing turnaround. Similarly, companies that operate behind the scenes should benefit from an uptick in housing industry growth.

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Strong Ties To The Paint Market
BWAY Holding Co. (NYSE: BWY), a manufacturer and distributor of metal and plastic containers, participates in the home improvement market by manufacturing containers for industries such as the paints, coatings and driveway sealants markets. It manufactures rigid metal containers like paint cans, but also large, steel pails and aerosol cans. In plastics, it makes injection-molded pails as well as blow-molded containers. All of these containers are used in industrial paints and coatings. BWAY faces steep competition from well-known packaging companies like Crown, Cork & Seal (NYSE: CCK) and Ball Corp. (NYSE: BLL), but it is unique in having a more concentrated market segment and very strong ties with the paint market. During fiscal year 2009, Sherwin-Williams (NYSE: SHW) contributed 19% of the company's metal packaging sales and 18% of the plastic packaging sales. Thus a turnaround in the housing and home improvement markets will greatly influence BWAY'S sales growth. (For more, see Where Top Down Meets Bottoms Up.)

By manufacturing plastic and metal containers, BWAY is subject to commodity risk, particularly resin and steel. The company is able to pass through the commodity costs with metal on a lag and resin through the contracting process. The manufacturing process also uses natural gas and other energy that is subject to market fluctuations. The company forecasts these commodities, and the ability to forecast can cause some variability in earnings. Therefore, the company has historically been able to recoup a majority of the commodity increases, but a timing mismatch affects short-term profit.

Compelling Valuation
Despite the housing market lull, BWAY has been improving its productivity and efficiency. Its efforts have paid off, as the company boasts a higher gross profit margin than its direct peers but is trading at a five-year expected PEG ratio at a discount. BWAY may also be able to deliver a surprise if the housing and home improvement market turnaround is faster or stronger than anticipated. (For related reading, check out PEG Ratio Nails Down Value Stocks.)

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