From Power Tools to Carpets, Housing Recovery Signs Mount

http://online.wsj.com/article/SB10001424127887323375204578268083108322300.html
Original Post Date: January 28, 2013

By: Kate Linebaugh and James R. Hagerty

The U.S. housing recovery is starting to show up in corporate results.

Companies that sell power tools, air conditioners, carpet fibers, furniture and cement mixers are reporting stronger sales for the fourth quarter, providing further evidence that a turnaround in the housing market is taking hold.

The results add to data on home construction and pricing that indicate a bottom may have been reached after the sector’s long slide. While the incoming data continue to be mixed, evidence that Americans are spending more to build and refurbish homes is raising executives’ confidence that the housing market will continue to improve and help fuel the broader economy.

Honeywell International Inc., HON +0.29%which derives about 5% of its sales from the U.S. residential housing market, said sales of heating and cooling systems rose 6% in the fourth quarter compared with the year-earlier period.

“That is the first sign of life that we have had in a while, and that is a good sign,” Honeywell Chief Financial Officer Dave Anderson said.

United Technologies Corp., UTX -0.38%which makes Carrier heating and cooling equipment, said orders of residential air-conditioning and heating products rose 20% in the fourth quarter compared with a year earlier, the fourth-straight quarter to notch a gain.

“Housing is what we see leading the economy out of the doldrums,” said Greg Hayes, chief financial officer of the industrial conglomerate.

Elsewhere, Oshkosh Corp. OSK +0.18%said orders for its McNeilus cement mixers and JLG extended forklifts, both used for home building, rose in the last three months of 2012. DuPont Co. DD -0.27%said demand for its Sorona carpeting fiber was stronger during the quarter thanks in part to the housing recovery. And Stanley Black & Decker Inc. SWK -0.03%said sales of power-tool sales rose 5% last year, a sign that Americans are investing in home repair.

The results follow a string of encouraging data on the housing market last year. Sales of existing U.S. homes rose to their highest annual level in five years in 2012 and registered their largest annual jump since 2004, according to the National Association of Realtors. Home construction, meanwhile, rose 12% in December and finished the year with the most new homes started since 2008. For all of 2012, 780,000 new homes were started, a 28% increase from the year earlier. Remodeling activity is also showing improvement, according to the Joint Center for Housing Studies of Harvard University.

That said, the sector is hardly out of the woods. The market hasn’t worked through the overhang of depressed properties, and conservative lending standards at banks mean mortgages aren’t always available to would-be buyers. It is also hard to tell how the sector will react when the Federal Reserve eventually dials back its aggressive efforts to keep rates on home loans low.

New data out of the Commerce Department disappointed markets Friday by showing a 7.3% drop in sales of new homes in December. While new-home sales finished the year up 20%, 2012 was the third-worst year for new-home sales on record dating back to 1963.

Still, executives at companies exposed to housing are growing more optimistic. Improvement in the sector could help broad tracts of the economy by creating jobs, improving consumer confidence and boosting property-tax receipts for municipalities. Construction typically is a big job creator during expansions, though the industry has been slow to staff up during the current recovery.

“The housing recovery will help lift businesses that have long been dormant,” said Mark Vitner, senior economist at Wells Fargo WFC +0.34%. “People will be fixing up homes to put them up for sale—buying new air conditioners, painting, fixing roofs. As the new-home market picks up, that really feeds into [gross domestic product].”

Daniel Oppenheim, a Credit Suisse AG CSGN.VX -1.20%analyst based in New York, predicts that home-improvement spending will rise 7% this year and 8% in 2014. He also expects construction of new homes to rise, and predicts that USG, a Chicago-based maker of gypsum wallboard, will record its first profit in 2013 after five years of heavy losses.

“As customers feel more confident in the value of their homes, they tend to make improvements and buy new furnishings,” said Farooq Kathwari, chief executive officer of furniture maker Ethan Allen Interiors Inc. ETH -0.12%But he cautioned that the economic recovery is still “fragile,” which is likely to prevent some customers from splurging. Ethan Allen, based in Danbury, Conn., last week reported that earnings in the quarter ended Dec. 31 rose 22% from a year earlier to $9.8 million.

Rail-freight operators are benefiting from the increased movement of furniture and supplies. Union Pacific Corp., UNP +1.29%which posted a 7% rise in quarterly profit, said lumber shipments increased 17% as housing starts showed solid year-to-year improvement.

In the second half of this year, Union Pacific’s business that transports goods by land, sea and air will be driven by furniture and “the things that you build housing with,” said the railroad’s marketing executive, Eric Butler.

At specialty truck maker Oshkosh, quarterly profit rose 20% at the end of 2012. Sales of the company’s cement mixers rose 36% to $63 million in the quarter, while sales of its extended-reach forklifts—called telehandlers—increased 39% to $207 million. “We’re seeing that come right up with the housing starts, which has been some good news,” said Wilson Jones, Oshkosh’s president.

Sounding a cautionary note, however, he said some of the company’s smaller customers are still struggling. While sales of cement mixers have nearly doubled from the same quarter in 2010, Mr. Jones said the gains are coming from a low base, and that sales are still as much as 70% below their precrisis peak.

Executives also warn that the broader economic environment remains fragile, in part due to continued battling over the budget in Washington.

“Just because the news looks a little better the last couple of weeks, we just don’t think this is a good time to declare economic victory,” Honeywell CEO David Cote said.

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