Of the few industries that remain beaten down, housing may still be the poster child. Demand for housing remains lows and housing starts remain at cyclical lows. As a result, many construction-related business continue to wait for a solid housing recovery. (For background reading, see 5 Factors To Watch In A Housing Recovery.)
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When Will We See It
I remember that back in 2009, many experts were cautiously optimistic that 2011 would be the year that the real estate sector, specifically residential real estate, would get back on its feet. The jury is still out, but it seems we may be waiting until 2012 or 2013 before seeing any real signs of sustainable improvement and recovery. If that is the case, then now may be a good time to look at beaten-down stocks in the housing industry. Markets are anticipatory creatures and if housing does recover in 2012 or 2013, some of these businesses could see their valuations expand significantly between now and then.
Profitable Housing Industry Plays
Mueller Water Products (NYSE:MWA) has been in business for more than 100 years. It's one of the largest providers of water infrastructure equipment and parts in the US. Many of its products have the No.1 or No.2 market share in their respective industries.
Shares trade for $4, or a market cap of $629 million. Mueller has suffered operational losses since the real estate and economic crisis swung into full gear. Total debt of nearly $700 million is not something to overlook. In addition to growth in residential real estate, aging water infrastructure in the U.S. creates demand for Mueller's products. Over the past five years, MWA has closed down plants, sold non-core assets and reduced capital spending. With a current ratio under 4, Mueller has a strong short-term balance sheet for meeting its current obligations. Net losses could easily turn into profits over the next year.
Weak demand continues to hamper Vulcan Materials (NYSE:VMC), one of the largest suppliers of cement and rock aggregates in the U.S. But if infrastructure demand continues to increase and the economy continues to get better, the need for basic materials will expand. The balance sheet is not without risk, however. Against a market cap of $5.7 billion, Vulcan has about $3 billion in debt. Smaller rival Martin Marietta Materials (NYSE:MLM), by comparison, has a market cap of $4 billion and just under $1 billion in debt. With what we just experienced in the credit markets, one can never discount a stronger balance sheet. In the quarter ending December 31, 2010, Martin earned 34 cents per share excluding extraordinary items, which is much better than the 6 cent loss in the same period a year earlier. Analysts are predicting a loss of 36 cents for the current quarter.
While not completely beaten down, Ameron (NYSE:AMN) shares trade at a respectable 14 times trailing earnings. Ameron manufactures and sells engineered products and materials for the chemical, industrial, energy, transportation and infrastructure industries. Its products include cylinder pipes, steel pipes and large-diameter wind towers for the U.S. wind-energy market. The company also builds lighting poles and other infrastructure products in Hawaii. The company has a market cap of $652 million and over $235 million in cash. On an enterprise value basis of $440 million, Ameron trades at less than 10 times EV/earnings. (For more on enterprise value, see Value Investing Using The Enterprise Multiple.)
The Bottom Line
Sometimes, beaten down stocks may be suffereing for good reason. On the other hand, they could be real gems, waiting for investors to retrieve them through research and analysis.
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