Now that more than six months have passed since the storm devastated the country's eastern coast, we can start to assess the effects these events will have on stocks, as some sectors are positioned to see substantial increases in product demand during the rebuilding period. Of course, these increases will not extend to all areas of the market so it is important to identify and separate the companies most likely to see increased demand and generate upside surprises in future earnings.
When looking at the companies best positioned to benefit from Sandy's rebuilding and recovery efforts, home improvement retailers immediately come to mind. To support this view, some of the largest names in the business have already shown evidence of sustainable strength with better-than-expected earnings results.
Home Depot Is perhaps the best example. With a market cap of $109.8 billion, the world's largest home improvement retailer last reported quarterly earnings of 67 cents per share. This marks a 32% improvement from the 50 cents per share seen the previous year, driven by a 14% increase in sales. The company's 24.6 price-to-earnings ratio and recent 34% dividend increase give the stock a strong investment position within the sector, and recent analyst upgrades suggest significant upside potential in the stock through the remainder of the year.
Home Depot houses a wide variety of building supplies including tools, appliances and paints (in addition to basic construction materials), and increasing sales in each of these areas supports the general picture for long-term bullishness.
By extension, watch for continued upside in Whirlpool , which continues to exhibit solid financial positioning and an impressively stable performance in its stock price. The home appliance company trades with a P/E of 16.9, and reported first quarter net income at $252 million ($3.12 per share). This is a 63% increase from the $92 million ($1.04 per share) seen the previous year. Earnings benefited from an advantageous U.S. energy tax, and the company recently announced a quarterly dividend of 62.5 cents per share ($2.5 annualized). This is an increase of 25% from the previous dividend offering (50 cents), and investors can now capitalize on an annual dividend yield of 2.2%.
Of course, the aftermath of such a major event cannot benefit all sectors of the market. Rebuilding for the sake of rebuilding can never be completely positive: If it was, we could simply destroy developed areas on our own without waiting for the next natural catastrophe. Some of the clearest examples of potential downside can be found in insurance companies with significant exposure to the east coast market.
Given these scenarios, additional downside should be seen in Allstate , which reported first quarter profit declines of 7.4% on higher claims from natural disasters. Last month, Allstate issued a warning for investors, explaining that catastrophe losses would cost the company $359 million. This compares negatively to the $259 million in costs seen last year. Underwriting profits at Allstate's liability unit fell 12% to $458 million for the reporting period, further complicating the company's position in the sector.
Some of the biggest sector negatives have been seen in Chubb , which reported fourth quarter profit declines of 77% on higher costs related to hurricane Sandy. More recently, the company reported stronger earnings per share and revenue in the first quarter, with both numbers topping analyst estimates. But the events of last year show some critical vulnerabilities in the company and should give some investors pause in coming quarters.
Similar negatives have been seen in Travelers , which saw Sandy-related losses (pre-tax) of more than $1 billion. The drag in net incomes created declines of more than 50% in the fourth quarter of 2012. First quarter earnings did manage to post a gain of 11% but it is clear that anything short of a catastrophic event would have been viewed as a positive for the weakened company. So, while we have seen something of a turnaround in both Chubb and Travelers, any major rallies in these stocks should be viewed with some level of skepticism.
The Bottom Line
When looking to play the rebuilding phase of Sandy's aftermath, some clear winners and losers start to emerge. Early-year performances have indicated positive trends for home improvement retailers, construction supply companies and appliances manufacturers. Look for this to continue as the post-Sandy rebuilding efforts continue into the third quarter.
At the time of publication the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.