prev

New Highs = Historic Lows | Resi Construction & the Cycle

Takeaway: Resi construction as a % of GDP is now 3.3%, a new post-crisis high, but also right in-line with prior cycle lows.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

New Highs = Historic Lows | Resi Construction & the Cycle - Compendium 090215

 

Today's Focus: MBA Mortgage Applications & July Construction Spending

 

Resi Construciton Spending | New Highs = Historic Lows

The long-term mean reversion upside to new construction activity is about as conspicuous as it gets for a large-scale Macro factor. 

 

Yesterday’s Construction Spending data showed both Total and Resi Construction spending made new post-crisis highs in July with private residential construction rising +1.1% MoM and accelerating to +15.6% YoY (along with the positive revision to 2Q data). 

 

However, inclusive of the multi-year recovery, resi construction remains just 3.3% of GDP – a relative level associated with trough activity observed across 75 years of housing cycles.  The 1st chart below serves as a simple but stark reminder of the current reality and secular opportunity. 

 

A Note on the Housing Cycle:  A somewhat obvious but seemingly underappreciated dynamic of the current cycle is that the recovery in housing lagged the broader macro inflection by more than two years.  Given that housing was the final, pre-crisis beneficiary of an epic, multi-decade (policy) game of rotate-the-asset bubble, it’s not surprising that the subsequent recovery has been slow, choppy and broadly unimpressive.

 

However, Housing's unique role in precipitating and propagating the financial collapse also makes historical cycle precedents (in terms of housing's position in the temporal pattern of the archetypal cycle) less informative as an analog

 

In short, while we’re late or mid-late cycle more broadly, we’re somewhere closer to early-mid or mid cycle in housing itself.  The housing cycle and the economic cycle are, of course, not mutually exclusive but they can tread variant medium-term paths.

 

 

Purchase Apps | Rates Ebb, Volume Flows

The MBA’s high frequency purchase application data showed demand rising to close out (what had been) an uninspiring August. Purchase demand rose +4.1% WoW and accelerated to +24.8% YoY – the fastest year-over-year rate of growth YTD – and comps remain easy through the balance of 2H.  On a QoQ basis, purchase activity is currently tracking -1.2% sequentially.  

 

Rates on the 30Y FRM were static at 4.08% in the latest week, holding at 3-month lows.  At current interest rates, affordability remains +4.2% better than the 2014 average and sits as a modest tailwind for HPI.   

 

 

New Highs = Historic Lows | Resi Construction & the Cycle - Resi Construction    of GDP

 

New Highs = Historic Lows | Resi Construction & the Cycle - Construction Spending Table

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase index   YoY Qtrly

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase YoY

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase   refi YoY

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase 2013v14v15

 

New Highs = Historic Lows | Resi Construction & the Cycle - Purchase LT

 

New Highs = Historic Lows | Resi Construction & the Cycle - 30Y FRM 

 

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


WSM | Cat Out of the Bag, But Still Expensive

Takeaway: Here's a quick summary of where we stand on WSM, as well as links to our 90 page Home Furnishings Black Book and video presentation.

HOME FURNISHINGS BLACK BOOK

Slide Deck: CLICK HERE

Video Replay: CLICK HERE

 

Here's a quick summary of where we stand on WSM, as well as links to our 90 page Home Furnishings Black Book and video presentation.

 

WSM  |    Cat Out of the Bag, But Still Expensive  - wsm chart1

 

CONCLUSION: There’s nothing structurally broken here (nothing major, at least). This is a good company with a portfolio of above-average quality brands. But growth is absolutely slowing here – not just cyclically, but also secularly. This should half the EPS growth rate into the mid-single digits (without an acquisition), and take down WSM’s industry leading returns. At a 15x multiple, we wouldn’t care, especially given that the company just rightsized the upcoming quarter’s expectations last week. But at almost 22x earnings when we’re looking for growth of 8%, we simply think this is too rich.

 

What We Like:

a) The core Williams-Sonoma brand is extremely defendable.

b) West Elm scores very well on our consumer surveys. It’s like a down market RH – and there’s a market for that.

c) DTC stands at 50.5% of total, which is the highest in all of retail except for pure play e-tailers like Amazon and Wayfair. d) WSM has a demonstrated history of buying back stock.

What We Don’t Like:

a) The core brand only accounts for 21% of sales.

b) West Elm should have 87 stores by the end of the year. We think there are only about 120 markets in the US that make sense for WE.

c) WSM is not ‘channel agnostic’. It is set up in a way where Retail competes against DTC for the same sales dollar. It works for now, but we don’t like it.

d) When net income growth reverts down to the 7-8% range, the company is likely to cut its repo activity in half unless it levers up to support it.

e) Ultimately, we think that the balance sheet will be put to use to make an acquisition – a late-cycle move to get growth going. We’re actually not against this at all for WSM assuming the deal is right, which is odd for us to say.    

 

WSM  |    Cat Out of the Bag, But Still Expensive  - WSM chart2 


PIR | We're Going Against The Grain -- Long

Takeaway: Here's a quick summary of where we stand on PIR, as well as links to our 90 page Home Furnishings Black Book and video presentation.

HOME FURNISHINGS BLACK BOOK

Slide Deck: CLICK HERE

Video Replay: CLICK HERE

 

Here's a quick summary of where we stand on PIR, as well as links to our 90 page Home Furnishings Black Book and video presentation.


PIR  |  We're Going Against The Grain -- Long - PIR chart1

PIR  |  We're Going Against The Grain -- Long - PIR chart2

 

CONCLUSION: PIR is a beaten-up, ugly value stock…there’s no two ways about it.  But with the stock trading at just 0.5x sales – a level it hasn’t sustained in six years -- we think there are two primary questions to ask. 1) Are we going into a major recession? and 2) Is management going to do anything stupid and destructive that would otherwise emulate a major recession?  If you answer ‘No’ to both of those questions, then we think it’s a very good risk/reward to buy the stock.  

 

Our Answers:

1) We have some major questions marks as it relates to the economy, but we’re not calling for an all-out recession.

 

2) This is a company that is no stranger to execution issues, but we don’t think that management is about to do anything stupid that would cause a downturn in the business (espec w ouster of CFO in Feb). Quite the opposite, in fact.

 

Consider this…

1. Over the past three years, PIR gave up 5 points of margin as it played catch-up with its e-commerce business, which stood at only 1% of sales in 2013. Today it is pushing 17%. E-comm will continue to be a headwind as it grows to the mid-30s (about 130bps of dilution over 4 years), but the combination of merch margin recovery and store base rationalization should more than offset the dilution. We think that ~300bps of the margin recoverable.

2. Interestingly enough, in our survey in this report, PIR’s categories ranked as the ones where consumers are most apt to switch sales online. If there is any company that should have invested in e-comm, it is PIR. 

3. We’ve had three straight years of elevated capex as the company built out e-comm capabilities. That rolls off this year, with asset consolidation (closing stores) and multi-year margin tailwinds takes RNOA from trough levels at 19% in FY16E to 31% by 2020. That’s a long tail, but even the slightest sign that we’ve found the bottom should make this stock rally. 

 

 

 


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

RH | Here's Where We Stand

Takeaway: Here's a quick summary of where we stand on RH, as well as links to our 90 page Home Furnishings Black Book and video presentation.

HOME FURNISHINGS BLACK BOOK

Slide Deck: CLICK HERE

Video Replay: CLICK HERE

 

Here's a quick summary of where we stand on RH, as well as links to our 90 page Home Furnishings Black Book and video presentation.


RH  |  Here's Where We Stand - RH chart1

 

 

TRADE: The Sept 10 print marks one of the few times we’ll expect ‘only’ an in-line print from RH. The timing of new product launches (Modern/Teen) has been well-telegraphed by management for 2H, not 2Q. Nonetheless, we’ll still be looking at 25-30% EPS growth.

 

TREND: The catalyst calendar looks solid for RH. Immediately following the print, we’ll see the launch of RH Modern and RH Teen. Then we’ll see four successive Design Gallery openings in Chicago, Denver, Austin and Tampa. Square footage will subsequently accelerate from a mid-single digit level to over 30%.

 

TAIL: We think RH will earn close to $11 per share in 3 years, which compares to the consensus at just over $6. The square footage component is well known, but we think people are missing…

a) the productivity and market share that we’re likely to see from each new store

b) how scalable this business model is without commensurate capital investment,

c) the leverage we’re likely to see as below-market real-estate deals being struck today begin to impact the P&L.

 

RH  |  Here's Where We Stand - RH chart2


W | Lightning Rod

Takeaway: W turned out to be the unintentional lightning rod of our Home Furnishings Black Book presentation yesterday. Here's the summary and links.

HOME FURNISHINGS BLACK BOOK

Slide Deck: CLICK HERE

Video Replay: CLICK HERE

 

W turned out to be the unintentional lightning rod of our Home Furnishings Black Book presentation yesterday. Here's the summary and links.

 

Full Text (in larger font) is below.

W  |  Lightning Rod - W chart1

 

This chart show the percent of people within each income bracket that are comfortable buying furniture without first touching it. 

W  |  Lightning Rod - W chart2

 

This chart shows that Wayfair's price points are meaningfully above what people are willing to pay. The company needs a high-end consumer, and even that might not be enough.

W  |  Lightning Rod - W chart3

 

CONCLUSION: We think Wayfair is a structural short. It might have RH’s sales base and market cap, but it’s unlikely to ever have RH profitability. Actually, it is very unlikely to earn a penny -- ever.  Here’s why…

1) Mono Channel does not work. Restricting sales to just the internet in this category, is just as bad as a retailer who focuses 100% on physical stores. Both are highly likely to fail over time.

2) TAM is limited. The categories that W needs to grow its business profitably skew to the higher-end consumer who is focused on aesthetic and assortment. W’s consumer is focused on Price. The competitive set there is not pretty. Of the $323bn home furnishings market, we think that just $20bn is relevant for W.  In other words, it currently has 12% share of its market. RH has 3%, IKEA 4%, WSM 6%, and PIR 1.5%.

3) The financial model does not work. Could W build from $2bn in revenue to $5bn over 3-4 years? Yes, it could. Given its solid balance sheet and lack of working capital, there’s no reason why that can’t happen. BUT, the whole time it will likely continue to lose something in the vicinity of $100mm/yr.

There will be ebbs and flows in this model when people will temporarily believe that it could make money. But let’s be clear, this is not like AMZN, who simply has to stop investing in drones and smart phones in order to make EBIT margins pop. Given Wayfair’s lack of capital intensity on the balance sheet, it has to continually invest in the P&L (SG&A) in order to grow.

 

 

 


CHART OF THE DAY: "It's The [CYCLE], Stupid

Editor's Note: The chart and excerpt below are from today's Early Look which was written by Hedgeye Senior Macro Analyst Darius Dale. Click here if you would like to leave lousy, consensus research behind and up your market game with the fastest-growing Independent Research platform on 2.0.

*  *  *

 

CHART OF THE DAY: "It's The [CYCLE], Stupid - Chart of the Day

 

  • Bayes factor (i.e. the base effect): Roughly two-thirds of the time, the second derivative of GDP in the forecast period carries the opposite sign of the second derivative of GDP in the comparative base period. Moreover, as the Chart of the Day below shows, there is exists a considerable degree of negative cointegration between the comparative base effect and the subsequent YoY growth rate. Translation: we have a reasonable basis for knowing which direction (up or down) to adjust the base rate.

 


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next