The market for homebuilding and remodeling products has shown signs of renewed life in recent months amid a rebound in U.S. housing and construction industries.
What that market hasn't experienced, at least not yet, is a big spike in business.
While certain trends are encouraging — including a slight rise in spending on home remodeling projects — many companies that supply those products have yet to see much positive impact on sales.
"We've seen new construction go up substantially since December 2011, but the renovation market has not gotten a substantial bounce from it yet. It's been OK, but we're still waiting for the big bounce," said SunTrust Robinson Humphrey analyst Keith Hughes, who follows building supply companies such as Mohawk Industries (MHK), Trex Co. (TREX) and Fortune Brands Home and Security (FBHS).
While sales in the sector haven't bounced back much, stock prices for building and renovation supply companies have been on a steady rise amid optimism that the improving homebuilding market will eventually create more business.
The 29 stocks in IBD's Building-Construction Products group hit a collective all-time high on Jan. 3. The group, which ranks No. 18 on IBD's list of top stock sectors, has more than tripled in value since February 2009, when the U.S. construction market was at a low. It lifted more than 2% Thursday. IBD's Household-Appliances/Wares group, No. 34 in rank of the 197 industry groups that IBD tracks, also hit a record high in January.
Will Remodeling Rev Up? Signs point to a strong home improvement activity rebound this year, Harvard's Joint Center For Housing Studies said in a new Leading Indicator Of Remodeling Activity report Thursday, noting robust spending in 2012's second half.
"The LIRA projects annual homeowner improvement spending will see accelerating double-digit growth through the third quarter of 2013," the report said.
The National Association of Home Builders, meanwhile, sees modest gains. Both groups analyze government data, but different sets.
In terms of sales, the remodeling market has experienced "slow but steady growth" over the past year or so, says Stephen Melman, NAHB's director of economic services.
The NAHB tracks remodeling spending — restricting its analysis to owner-occupied residences — and estimates a spending gain of 4.5% for 2012, while expecting a 2.4% rise in 2013 and 1.7% in 2014.
"You're seeing simple, inexpensive projects rather than large-scale projects," Melman said. "Homeowners might do something like renovate the laundry, or convert an office into a spare bedroom to accommodate an older family member who can't take care of herself anymore. The trend is projects that might not add value to the house, but make it more livable.
The slow but steady growth that Melman mentions is reflected in the recent returns of companies that supply products to the building and remodeling markets.
Just about all of them — including the two biggest, Mohawk and Masco (MAS) — have logged single-digit or no quarterly sales growth lately.
The slow rate of growth is partly because a lot of Americans remain gun-shy about spending money on nonessential items.
"The renovation market depends a lot on consumer spending and confidence, and those haven't come back enough to drive sales significantly higher," Hughes said.
On the flip side, with mortgage interest rates low and the refinancing pace high, housing analysts say owners could end up staying longer than usual in their present homes. Another potential encouragement to remodeling is that the reduction in monthly payment needed after a typical refi can free up cash.
One building supply company that has seen a rapid rise in its sales and share price is American Woodmark (AMWD). It makes kitchen cabinets and vanities for the remodeling and home construction markets.
American Woodmark has grown sales by double-digit percentages seven times the past eight quarters. It also turned a profit the last two quarters after a long run of red ink.
Construction Bump Jonathan Wolk, American Woodmark's chief financial officer, says his company's top-line gains have been driven by better market demand — "almost entirely from new construction" — plus improvements in the firm's market share.
He says many building products firms are benefiting from an uptick in repair and remodel services.
"The primary driver to remodeling market sales in our category is growth in the selling prices of existing homes," Wolk told IBD by email. But "this has had only a modest impact because the movement is recent and pales in comparison to the price declines that took place.
"Remodeling in our category has been flat to slightly down," he said. "Our remodeling sales have been up by mid-single digits because we have gained market share.
Like housing, the remodeling market in the U.S. has seen a great deal of turbulence in recent years. The NAHB estimates that spending on residential owner-occupied remodeling fell to $115 billion in 2011 from a peak $144 billion in 2006.
Almost all building/renovation niches suffered in the downturn.
In a recent note initiating coverage on Fortune Brands Home & Security, JPMorgan analyst Michael Rehaut estimated the North American market for kitchen and bath cabinetry at about $6.8 billion in 2011. That was down from a peak near $14.4 billion in 2006. The industry showed little movement in 2012.
"The flattish growth in 2012 has been largely driven by poor consumer demand surrounding 'bigger ticket' remodeling jobs such as kitchen remodeling ... due to a still somewhat inconsistent job market and more hesitant consumer confidence," Rehaut said.
He estimates that the North American market for plumbing and accessories fell to about $3 billion in 2011 from $4 billion in 2006. And the windows and doors market — now around $7 billion — has declined "significantly" since 2006.
New data on the remodeling industry are due out Monday from the NAHB, on the fourth quarter of 2012. In the third quarter, its Remodeling Market Index finally climbed back to the midway mark of 50, indicating that as many remodelers say market activity is rising as say it's falling. The RMI hasn't passed 50 since 2005.
NAHB Chief Economist David Crowe said in a statement that the improved RMI shows the industry in an "orderly recovery" but "continues to be constrained by factors such as tight credit and problematic appraisals.
In Harvard's report, remodeling futures director Kermit Baker said economic and political risks could derail a remodeling recovery.
"However," he said, "the solid momentum behind homebuilding activity, existing-home sales, low financing costs, and remodeling contractor sentiment all point to a solid start to the new year for home improvement spending."