The COVID-19 pandemic spurred people to fix up their homes, but it also spawned a housing boom at the same time as lumber mills were shut down and ports were clogged with ships unable to unload their cargo. It was a perfect storm that culminated in the mother of all lumber shortages that’s still being felt today.
Lumber prices steadily climbed all last year and hit an all-time high in early May of $1,711 per thousand board feet, more than triple the level they were at a year ago, but the soaring costs caused a cascade of events.
New home starts stalled because it was too expensive to build, which led to a shortage of housing inventory. That spurred rising prices of new and existing homes, fueling a boom in apartment rentals, which even led to rent prices soaring. Fannie Mae expects median rent increases to exceed 5% this year, among the biggest hikes in the past decade.
Walk into any big box home improvement center today and dimensional lumber will be at least twice what you’d expect to pay while even the cheapest grades of plywood that used to retail for less than $10 now go for $60 apiece. Better grades are pushing close to $100 each.
It’s unsustainable because consumers will put off projects and builders will stop building, and that puts this blue-chip stock at risk.
Capturing the stay at home crowd
Home Depot (NYSE:HD) was a beneficiary of the housing market boom long before the pandemic struck, with its stock rising 137% over the past five years compared to a 101% gain by the S&P 500.
It and rival Lowe’s (NYSE:LOW) also thrived during the coronavirus outbreak. Their shares jumped 22% and 34%, respectively, versus a 16% gain for the index. But after peaking at all-time highs last month, their stocks have peeled back by 13% (the S&P is about break-even), and the effects of the lumber shortage, exorbitant pricing, and the housing crisis may begin to show up on their financial statements.
Customers, it turns out, are not shopping their stores as much anymore. Mobile-device location data from analytics firm Placer.ai says that foot traffic patterns indicate the home improvement shopping boom may be coming to an end.
Customers are taking a staycation from renovations
Between 2019 and 2020, Home Depot enjoyed a 13.1% increase in traffic at its stores while Lowe’s saw a 21% rise, a trend that continued into 2021 with first-quarter gains of 21% and 22%, respectively.
Yet even as the DIY centers witnessed strong year-over-year increases each quarter, they were also seeing sequential declines in foot traffic, signaling the coming slowdown. That downturn might now be upon us.
In May, visits to Home Depot and Lowe’s fell off the table. Home Depot’s foot traffic declined 12% for the month while Lowe’s plummeted over 22%.
That’s backed up by data from Jungle Scout which found that in-store shopping at the home improvement giants continued to steadily decline, a phenomenon striking a number of brick-and-mortar retailers.
It’s not an apocalypse, as Placer.ai’s two-year data shows current-year visits at Home Depot and Lowe’s remain above those in 2019 for the same period. However, it does indicate there may be a reversion to the mean underway, and that could be bad news for their stocks.
Nailing down the cost to the bottom line
Even as lumber prices back down from their record highs — futures are down 40%, the biggest drop in history — that still might not translate into a rebound for the DIY centers. Today’s lower prices below $1,000 per thousand board feet are still well above the highest prices seen last year.
Without new stimulus checks hitting their mailboxes, consumers may have completed all the home renovations and remodelings they were going to undertake, and homebuilders will still find it a pricey endeavor to add more inventory.
Home Depot trades at 22 times trailing earnings and 20 times next year’s estimates — not crazy valuations but not a discount either, even after its shares pulled back a bit. Going for twice analysts’ long-term earnings growth rate and 31 times the free cash flow it produces, this blue-chip stock is offering a blue-chip premium that it might not deserve at the moment.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/06/23/this-blue-chip-may-be-taking-a-hit-from-expensive/