Should You Ignore Home Depot and Buy This Magnificent Housing Stock Instead?
Saturday, Oct 26, 2024 4:01 am ET
2min read In the realm of home improvement retail, Home Depot (NYSE: HD) has long been a dominant force. However, with lower interest rates and a robust housing market, investors may be wondering if there are more lucrative opportunities elsewhere. This article explores the potential of Pentair (NYSE: PNR), a water solutions company, as an alternative investment in the housing sector.
Home Depot and the housing market
Lower interest rates are expected to boost Home Depot's prospects, but the stock's valuation already reflects this expectation. Additionally, Home Depot's customer transactions have been declining on a year-over-year basis since the second quarter of 2021, which could make price increases challenging in a lower inflationary environment.
Pentair: A hidden gem in the housing market
Pentair, a manufacturer of pool products and water solutions, offers an attractive alternative for exposure to the housing market. The company's CEO, John Stauch, recently noted that new in-ground pool construction in 2024 is expected to be near the 60,000-pool range, compared to roughly 72,000 in 2023 and 78,000 in 2019. This demonstrates the sensitivity of new pool construction to housing market conditions, and an improvement in the housing market could lead to increased spending on new pool construction.
Pentair's other two segments, flow and water solutions, are also exposed to the residential market and should benefit from an improvement in housing market conditions. About 39% of flow sales and 33% of water solutions sales go to the residential sector. The company's net sales are roughly evenly split among its three segments.
Pool products: A growing market
While the improvement in the housing market will provide a near-term boost to Pentair's sales, it's important to note that 80% of the pool segment's sales are to the existing pool market. As the number of pools continues to expand, the long-term growth opportunity in the pool products market remains strong. Management estimates that non-discretionary spending per pool is around $400, and the increasing adoption of automation in pools, as well as new lighting, variable-speed pumps, and high-efficiency heating solutions, opens up long-term potential for sales growth in the existing pool market.
Restructuring for improved profitability
Alongside the near- and long-term growth catalysts, Pentair's management is undertaking an ongoing set of transformational initiatives to improve its return on sales from 20.8% in 2023 to 24% in 2026. These initiatives include targeted pricing, improved sourcing, lean management techniques, and investing in automation. By implementing the 80/20 rule (the Pareto principle), Pentair aims to improve the efficiency of its businesses acquired over the last 30 years.
A stock to buy
Pentair is not just a play on an improving housing market; it's also a company in the throes of a transformational margin-improving initiative with excellent long-term prospects from ongoing increases in the installed base of pools and improvements in water quality. Trading at 23 times estimated 2024 earnings, Pentair has outstanding growth prospects over the next decade. The company trades at a discount to Home Depot and has better growth prospects.
In conclusion, while Home Depot remains a solid investment in the home improvement retail sector, investors seeking exposure to the housing market may find Pentair to be a more attractive option. With a strong focus on pool products and water solutions, a robust restructuring initiative, and a discounted valuation, Pentair offers an enticing opportunity for long-term growth.
Home Depot and the housing market
Lower interest rates are expected to boost Home Depot's prospects, but the stock's valuation already reflects this expectation. Additionally, Home Depot's customer transactions have been declining on a year-over-year basis since the second quarter of 2021, which could make price increases challenging in a lower inflationary environment.
Pentair: A hidden gem in the housing market
Pentair, a manufacturer of pool products and water solutions, offers an attractive alternative for exposure to the housing market. The company's CEO, John Stauch, recently noted that new in-ground pool construction in 2024 is expected to be near the 60,000-pool range, compared to roughly 72,000 in 2023 and 78,000 in 2019. This demonstrates the sensitivity of new pool construction to housing market conditions, and an improvement in the housing market could lead to increased spending on new pool construction.
Pentair's other two segments, flow and water solutions, are also exposed to the residential market and should benefit from an improvement in housing market conditions. About 39% of flow sales and 33% of water solutions sales go to the residential sector. The company's net sales are roughly evenly split among its three segments.
Pool products: A growing market
While the improvement in the housing market will provide a near-term boost to Pentair's sales, it's important to note that 80% of the pool segment's sales are to the existing pool market. As the number of pools continues to expand, the long-term growth opportunity in the pool products market remains strong. Management estimates that non-discretionary spending per pool is around $400, and the increasing adoption of automation in pools, as well as new lighting, variable-speed pumps, and high-efficiency heating solutions, opens up long-term potential for sales growth in the existing pool market.
Restructuring for improved profitability
Alongside the near- and long-term growth catalysts, Pentair's management is undertaking an ongoing set of transformational initiatives to improve its return on sales from 20.8% in 2023 to 24% in 2026. These initiatives include targeted pricing, improved sourcing, lean management techniques, and investing in automation. By implementing the 80/20 rule (the Pareto principle), Pentair aims to improve the efficiency of its businesses acquired over the last 30 years.
A stock to buy
Pentair is not just a play on an improving housing market; it's also a company in the throes of a transformational margin-improving initiative with excellent long-term prospects from ongoing increases in the installed base of pools and improvements in water quality. Trading at 23 times estimated 2024 earnings, Pentair has outstanding growth prospects over the next decade. The company trades at a discount to Home Depot and has better growth prospects.
In conclusion, while Home Depot remains a solid investment in the home improvement retail sector, investors seeking exposure to the housing market may find Pentair to be a more attractive option. With a strong focus on pool products and water solutions, a robust restructuring initiative, and a discounted valuation, Pentair offers an enticing opportunity for long-term growth.
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