Corporates

Transcription

Corporates

Corporates
Building Materials and Construction / U.S.A.
The Tale of the “Measuring” Tape
U.S. Home Improvement Industry
Special Report
Home Improvement Spending at a Steady Pace
Spending Continues to Rebound: Home improvement spending is expanding at a steady
pace, despite irregular economic growth in 2014. Improving housing turnover during 2013 and
gains in home prices last year and so far this year are leading to increased optimism and
spending for home remodeling. Fitch Ratings projects home improvement spending will
increase 6% in 2014 and grow at a similar pace next year.
Related Research
Measuring
Wheel
(The
U.S.
Nonresidential Construction Industry
2014/2015) (September 2014)
Building Materials Volume and
Pricing
Trends
(Second-Quarter
2014) (August 2014)
U.S. Homebuilding/Construction: The
Chalk
Line
(Summer
2014)
(July 2014)
Building Materials Volume and
Pricing Trends (First-Quarter 2014)
(May 2014)
2014 Outlook: U.S. Building and
Home
Products
and
Services
(Residential
Construction
Will
Continue
to
Drive
Growth)
(December 2013)
2014 Outlook: U.S. Housing and
Homebuilders (A Continued Mild
Recovery) (December 2013)
Analysts
Robert G. Rulla, CPA
+1 312 606-2311
[email protected]
Robert P. Curran
+1 212 908-0515
[email protected]
Philip Zahn
+1 312 606-2336
[email protected]
Volatile Housing Turnover: Housing metrics all showed improvement in 2013. However, what
began as an untypically moderate housing recovery has decelerated further since late 2013.
For the first eight months of 2014, existing home sales fell 5.7%, while new home sales grew
2%. Single-family housing starts increased 3.1% compared with the same period last year.
Nevertheless, growing strength in the economy and employment should positively influence
home improvement spending in 2015.
Higher Home Prices: Despite volatile housing market activity so far this year, national home
price indices have been broadly increasing. The median existing home price in August 2014
was $219,800, 4.8% greater than in August 2013. The year-over-year growth has decelerated
somewhat from 2013, when the median home price increased 11.5% compared with 2012.
Nonetheless, more modest but steady home price inflation ahead should continue to drive
home improvement spending.
Return on Investment: Higher resale values positively influenced the cost-value ratio of
remodeling projects. According to the Cost Versus Value survey from Remodeling magazine,
the overall return for remodeling projects improved to an average of 66.1% in 2014 from 60.6%
in 2013. According to the report, a modest increase in construction costs was more than offset
by the improvement in average national resale value.
Challenges Remain: While the home improvement sector has shown positive trends in recent
years, certain challenges could derail a sustained rebound in remodeling spending.
Unemployment levels remain high, consumer credit standards continue to be tight, and
consumer confidence is still subpar relative to historical patterns.
Negative Equity Overhang: Strong home price appreciation over the past year has allowed
many homeowners to increase equity in their homes. However, the number of homeowners
with little or no equity remains elevated. Fitch believes that homeowners with little or no equity
may perhaps underinvest in maintenance as well as home improvement projects.
Credit Easing but Remains Tight: Bank lending standards are easing a bit but remain
relatively tight, making it difficult for homeowners to use credit to finance remodeling projects.
Cash-out refinancings continue to be at very low levels and borrowings under home equity
loans have been declining since 2008.
Restraint in Big-Ticket Projects: Fitch expects spending for big-ticket remodeling projects will
continue to lag the overall improvement in the remodeling sector, as credit availability remains
constrained. Nevertheless, there are some indications that homeowners, although still cautious,
are somewhat more willing to undertake larger discretionary projects and purchases.
www.fitchratings.com
October 10, 2014
Corporates
Estimates of the Size of the Home Improvement Industry
Coverage
The ADT
Corporationa
Masco
Corporationa
Mohawk
Industries,
a
Inc.
Owens
Corninga
PPG
a
Industries Inc.
RPM
a
International
The SherwinWilliams
Companya
Stanley Black
& Decker Inc.a
USG
Corporationa
Whirlpool
Corp.a
The Home
Depot Inc.b
Lowe’s
Companies
b
Inc.
IDR
LongTerm Sr.
Unsec.
Rating
Outlook
BBB
BBB
Stable
BB
BB
Positive
BBB
BBB
Positive
BBB
BBB
Stable
A
A
Stable
BBB
BBB
Stable
A
A
Stable
A
A
Negative
B
BB-
Stable
BBB
BBB
RWN
A–
A–
Stable
NR
NR
a
Covered by Robert Rulla. bCovered by
Philip Zahn. IDR – Issuer Default Rating.
RWN – Rating Watch Negative.
NR – Not rated.
Source: Fitch Ratings.
HIRI Estimates
The Home Improvement Research Institute (HIRI) estimates the home improvement products
market was about $289.8 billion in 2013, up 4.2% over an estimated $278.1 billion for 2012.
This market estimate includes products purchased (exclusive of any labor) for existing
residential structures. The HIRI also estimates that the annual growth rate during 2009 2013
was 0.7%, with the professional market increasing 1.5% annually while the consumer market
grew at a 0.4% annual rate.
JCHS Estimates
The Harvard University Joint Center for Housing Studies (JCHS) estimates home improvement
spending was $275 billion in 2011 (the latest data available), down 4.2% from the $287 billion
in 2009. The 2011 spending level represents an almost 95% increase over estimated 1995
expenditures of $149 billion, but is 16.2% below the peak level of $328 billion spent in 2007.
The JCHS estimates about 82% of remodeling expenditures in 2011 were from owneroccupied residential properties, with the remaining 18% from rental units. By comparison,
home improvement spending on owner-occupied properties represented close to 84% of
expenditures during 2007, compared with 16% spent on rental properties. The JCHS also
estimates about 75% of expenditures during 2011 were related to improvements and 25% were
maintenance and repair spending. In 2007, approximately 80% of the total spending was
directed toward improvements and the remaining 20% to maintenance and repairs.
U.S. Census Bureau Estimates
The most current residential alteration and repair statistics from the U.S. Census Bureau are
for 2007. Expenditures totaled $226.4 billion for the year, a 0.8% decline from the $228.2 billion
of residential alteration and repair spending in 2006. The Census Bureau discontinued its
Survey of Residential Alteration and Repairs, and it last published residential improvements
and repair data in its fourth-quarter 2007 report.
The Census Bureau’s Value of Construction Put in Place Survey provides an estimate of
spending for private residential improvements. This measure does not include expenditures for
rental, vacant or seasonal properties. This estimate also excludes homeowner spending for
painting, landscaping, routine maintenance and repair work. Spending for private residential
improvements totaled $133.1 billion in 2013, 5.6% more than the estimated $126 billion spent
in 2012. Through the first eight months of 2014, these expenditures totaled $80.8 billion, a
3.9% decline compared with the same period last year.
Retailer Estimates
In 2005, both The Home Depot Inc. (Home Depot) and Lowe’s Companies Inc. (Lowe’s),
leading home improvement retailers, had estimated the U.S. home improvement market to be
approximately $700 billion. (Neither has provided estimates since then.) This market estimate
includes do-it-yourself (DIY) products, services, labor and major components of the
professional market.
October 10, 2014
2
Corporates
Residential Alterations and Repairs
($ Mil.)
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total Expenditures
YOY
% Change
Improvements —
Owner Occupied
YOY
% Change
Improvements —
Rental Properties
YOY
% Change
Maintenance and
Repairs
YOY
% Change
16,299
17,498
18,512
21,114
25,239
29,034
31,280
37,461
42,231
46,338
46,351
45,291
49,295
70,597
82,127
94,329
98,413
106,864
108,054
115,432
107,692
115,569
121,899
130,625
124,971
131,362
133,577
133,693
142,900
152,975
157,765
173,324
176,899
198,556
215,030
228,208
226,359
—
—
—
—
—
10.4
7.4
5.8
14.1
19.5
15.0
7.7
19.8
12.7
9.7
0.0
(2.3)
8.8
43.2
16.3
14.9
4.3
8.6
1.1
6.8
(6.7)
7.3
5.5
7.2
(4.3)
5.1
1.7
0.1
6.9
7.1
3.1
9.9
2.1
12.2
8.3
6.1
(0.8)
—
—
—
—
—
8,028
8,534
8,040
10,244
11,813
14,389
16,727
19,314
21,916
25,892
23,768
22,427
24,877
30,336
33,680
40,946
40,853
47,202
45,110
42,982
36,673
48,685
57,269
64,643
56,717
66,381
66,634
72,360
75,031
81,091
85,023
97,885
100,344
115,399
131,092
144,931
139,103
120,144
112,038
111,564
120,918
126,050
133,111
10.0
6.3
(5.8)
27.4
15.3
21.8
16.2
15.5
13.5
18.1
(8.2)
(5.6)
10.9
21.9
11.0
21.6
(0.2)
15.5
(4.4)
(4.7)
(14.7)
32.8
17.6
12.9
(12.3)
17.0
0.4
8.6
3.7
8.1
4.8
15.1
2.5
15.0
13.6
10.6
(4.0)
(13.6)
(6.7)
(0.4)
8.4
4.2
5.6
1,911
2,246
2,549
2,378
3,668
3,266
3,209
5,238
5,365
5,259
6,561
6,054
6,290
10,956
12,099
15,990
17,333
16,081
16,855
16,647
12,514
16,063
18,845
18,796
21,223
24,872
25,798
19,352
25,518
29,649
25,250
28,091
32,461
32,545
30,645
29,888
32,516
—
—
—
—
—
—
21.3
17.5
13.5
(6.7)
54.2
(11.0)
(1.7)
63.2
2.4
(2.0)
24.8
(7.7)
3.9
74.2
10.4
32.2
8.4
(7.2)
4.8
(1.2)
(24.8)
28.4
17.3
(0.3)
12.9
17.2
36.7
(25.0)
31.9
16.2
(14.8)
11.3
15.6
0.3
(5.8)
(2.5)
(8.8)
—
—
—
—
—
—
6,361
6,717
7,924
8,491
9,758
11,379
11,344
12,909
14,950
15,187
16,022
16,810
18,128
29,307
36,349
37,394
40,227
43,580
46,089
55,800
55,505
50,821
45,785
47,185
47,032
40,108
41,145
41,980
42,352
42,236
47,491
47,379
44,094
50,611
53,293
53,389
54,738
—
—
—
—
—
—
7.9
5.6
18.0
7.2
14.9
16.6
(0.3)
13.8
15.8
1.6
5.5
4.9
7.8
61.7
24.0
2.9
7.6
8.3
5.8
21.1
(0.5)
(8.4)
(9.9)
3.1
(0.3)
(14.7)
2.6
2.0
0.9
(0.3)
12.4
(0.2)
(6.9)
14.8
5.3
0.2
2.5
—
—
—
—
—
—
—
—
—
—
84,142
80,827
—
(3.9)
—
—
—
—
—
—
—
—
Jan.–Aug. 2013
Jan.–Aug. 2014
YOY – Year over year.
Source: U.S. Bureau of the Census – Construction Put In Place.
October 10, 2014
3
Corporates
Recent Trends
Private Fixed Residential Investment
Private fixed residential investment grew moderately during the past three years after steep
declines during 2007 2009. Total private fixed residential improvement rose 17.5% in 2013 to
$519.9 billion after growing 14.6% in 2012 and 1.3% in 2011. Investment in this sector fell
17.8% in 2007, 25.1% in 2008, 24% in 2009 and 2.8% in 2010.
While private fixed residential investment grew during the past two years, the level of
investment during 2013 remains 39.4% below the 2005 peak. During the past 60 years, private
fixed residential investment accounted for about 4.6% of GDP. This percentage peaked in 2005
at 6.5% and gradually declined to 6% in 2006, 4.8% in 2007, 3.5% in 2008, 2.7% in 2009, 2.5%
in 2010 and 2.5% in 2011. Private fixed residential investment as a share of GDP rose to 2.7%
in 2012 and 3.1% in 2013.
Conversely, investments on residential improvements (part of the total private fixed residential
investment) have been less volatile, growing 4.4% in 2011, 5.3% in 2012 and 4.3% in 2013 to
about $173.4 billion. Previously, investment on residential improvements fell 1.2% in 2007,
6.2% in 2008, 5.7% in 2009 and 0.3% in 2010. The level of investment on residential
improvements is now almost equal to the prerecession peak of $173.6 billion in 2005.
The Bureau of Economic Analysis uses the value-put-in-place data from the Census Bureau’s
monthly survey of construction to estimate private fixed residential investment that is included
in the GDP estimates.
Private Fixed Residential Investment
(1980–2013)
Total Residential Fixed Investment
($ Bil.)
Improvements
1,000
800
600
400
200
0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
Source: Bureau of Economic Analysis.
Private Fixed Residential Investment as a Share of GDP
(1952–2013)
Average = 4.6%; 2013 = 3.1%
(%)
7.0
6.0
5.0
4.0
3.0
2.0
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
October 10, 2014
4
Corporates
Market Conditions Continue to Recover
The National Association of Homebuilders’ (NAHB) Remodeling Market Index (RMI) fluctuated
within a range of 19.0–57.8 on a seasonally adjusted basis since 2001. The RMI measures
remodeler perceptions of market demand for current and future residential remodeling projects.
A number above 50 indicates the majority of remodelers view market conditions as improving.
The RMI improved in second-quarter 2014 to 56.1 from 52.8 during first-quarter 2014 and 55.0
during second-quarter 2013. However, the second-quarter 2014 results are slightly lower than
the 56.8 and 57.0 recorded during the third and fourth quarters of 2013, respectively. The
NAHB indicated uncommonly harsh winter weather and continued labor shortages created a
drag on many parts of the housing market, including remodeling, during first-quarter 2014. The
index gained momentum during second-quarter 2014 as completion of postponed work during
the previous quarter helped remodelers regain confidence. Additionally, homeowners felt more
secure about their economic situations and were more willing to undertake remodeling projects,
according to the NAHB.
The current market conditions component of the RMI increased to 55.9 during
second-quarter 2014 from 53.4 in the first quarter and 54.1 a year ago. The current market
conditions index has been above 50 for eight consecutive quarters. The current market
conditions index for owner-occupied properties continues to show positive trends, with all three
components (major additions and alterations, minor additions and alterations, and maintenance
and repair) registering a score above 50 for eight straight quarters. The owner-occupied scores
during second-quarter 2014 were above 60 for all three components, the first time since firstquarter 2004.
The future expectations index also is encouraging, rising to 56.3 in second-quarter 2014 from
52.3 during the first quarter and 55.9 a year ago. All of the indicators for future activity (i.e. calls
for bids, work committed for three months, backlog and appointments) were more than 50 for
five consecutive quarters. According to the NAHB, the remodelers’ positive sentiment is directly
related to increased demand for services. The NAHB indicated rising home prices are making
remodeling jobs possible for more homeowners while existing home sales provide additional
momentum as homeowners prepare their homes for market.
The trend reported by the NAHB’s RMI is supported by a survey conducted by the National
Association of the Remodeling Industry (NARI). The survey uses a scale of 1 to 9, with a score
of 1 indicating “much worse” conditions compared with the same time last year and a score of 9
indicating “much better” conditions. A score of 5 indicates current market conditions are “about
the same” from a year-earlier levels. NARI’s 2014 second-quarter Remodeling Business Pulse
(RBP) data of current and future remodeling business conditions improved during the second
quarter after slowing during the first quarter. According to NARI, current business conditions
improved to 6.29 during second-quarter 2014 from 6.07 during the first quarter. This rating
steadily increased during 2012 and 2013 before falling slightly during the first quarter of 2014.
The number of inquiries grew to 6.38 during the second quarter from 6.24 during the first
quarter while and requests for bids increased to 6.29 from 6.16. The conversion of bids to jobs
jumped to 5.83 from 5.71 and the sales value of jobs advanced to 6.20 during the second
quarter of 2014 from 5.84 last quarter. According to NARI, the main reasons for growth
continue to be earlier postponement of projects (80% of respondents), improvement in home
prices (59%) and economic growth (47%).
October 10, 2014
5
Corporates
Remodeling Market Index (RMI): First-Quarter 2001 to Second-Quarter 2014,
Current and Future Expectations Indices, U.S. and Regions
(Seasonally Adjusted)
Period
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
RMI
53.7
52.8
44.2
49.9
50.6
49.3
49.3
46.7
45.5
50.9
54.6
56.0
57.4
51.5
52.1
52.4
53.3
52.6
51.3
47.1
48.5
44.6
46.6
47.3
46.6
44.8
43.9
39.6
40.5
40.5
31.7
21.9
32.9
36.9
40.5
42.3
45.1
41.6
41.8
42.8
47.6
45.5
42.9
48.3
46.8
45.2
50.2
54.9
49.1
55.0
56.8
57.0
52.8
56.1
National
Current Market
Future
Conditions Expectations
53.9
53.6
51.8
53.9
46.2
42.2
49.2
50.5
50.9
50.3
49.7
48.8
50.3
48.3
47.3
46.1
44.8
46.3
50.5
51.3
54.1
55.1
55.0
56.9
56.9
57.8
50.6
52.4
51.8
52.4
50.7
54.0
52.9
53.6
52.4
52.8
50.9
51.8
46.6
47.5
48.1
48.9
45.6
43.5
46.9
45.1
48.6
46.0
46.5
46.6
45.3
44.3
45.1
42.7
40.9
38.3
42.7
38.3
42.2
38.9
34.1
29.3
24.7
19.0
35.6
30.2
39.0
34.8
41.2
39.8
44.3
40.4
46.2
43.9
43.5
39.7
44.8
38.9
44.6
41.0
47.4
47.7
46.6
44.4
44.5
41.3
50.4
46.2
49.2
44.4
46.5
44.0
51.7
48.8
53.6
56.3
50.4
47.8
54.1
55.9
57.5
56.0
56.0
58.0
53.4
52.3
55.9
56.3
Components — Current Market Conditions
Major Additions
and Alterations
OwnerRental
Occupied Properties
55.4
40.4
55.6
35.1
44.3
29.8
50.2
32.3
54.0
33.6
52.1
35.8
53.0
33.6
48.9
27.5
47.4
25.4
54.9
33.1
58.6
27.0
63.4
39.9
62.1
41.7
54.6
35.7
54.9
29.6
57.5
34.5
55.8
39.7
55.7
42.5
54.7
32.7
48.2
36.5
52.4
31.8
45.6
31.1
50.8
27.3
48.9
33.3
49.3
32.8
45.5
30.0
45.8
25.1
41.8
21.8
41.0
26.6
41.8
22.7
25.2
19.7
16.7
13.5
28.5
17.2
34.5
16.3
39.5
20.9
43.4
24.0
44.8
24.8
42.1
22.9
44.7
29.7
45.9
20.3
47.6
27.3
44.6
28.8
42.6
27.3
49.2
32.1
49.3
29.4
48.1
31.3
54.7
38.1
56.6
38.4
51.8
38.7
59.0
32.8
64.1
38.2
59.0
42.0
56.9
32.1
60.1
39.8
Minor Additions
and Alterations
OwnerRental
Occupied Properties
55.9
40.0
55.8
37.1
48.8
37.6
56.5
37.7
58.1
37.7
55.4
38.7
53.9
36.8
53.8
33.7
50.9
32.8
57.5
37.3
62.0
36.7
59.5
44.4
63.0
46.7
58.0
38.9
57.5
36.8
54.7
40.7
56.1
47.7
57.4
43.2
55.1
35.5
49.2
38.7
54.1
35.4
49.2
37.1
52.4
31.6
52.7
38.4
51.7
34.2
50.5
31.5
51.7
32.4
44.2
26.7
48.9
32.0
46.2
27.1
38.2
25.0
25.4
18.0
40.3
23.8
45.5
22.9
47.4
29.2
53.4
25.7
53.4
27.4
49.5
28.9
48.0
34.8
53.5
28.2
54.9
31.0
51.6
34.9
51.1
30.5
59.1
34.6
57.8
36.7
52.6
34.0
57.5
36.1
57.5
45.1
55.3
36.2
61.4
39.7
64.1
44.5
61.0
50.0
59.7
36.1
60.4
44.3
Maintenance
and Repair
OwnerRental
Occupied Properties
60.0
54.6
59.2
55.7
54.8
44.7
53.1
46.4
56.6
46.9
56.0
48.8
56.9
46.8
53.3
45.9
50.7
45.0
57.6
46.2
54.1
50.6
61.2
52.7
59.7
53.4
53.8
49.7
57.8
50.6
50.0
53.4
55.5
55.9
55.4
52.7
59.1
46.2
49.1
46.7
54.8
43.4
52.2
49.6
54.9
42.4
53.2
48.9
53.0
45.2
55.0
43.6
51.5
42.7
51.7
42.3
51.1
41.6
56.1
42.7
46.8
37.8
39.6
27.5
52.2
35.8
55.9
38.4
52.4
37.4
58.4
37.3
58.8
43.3
56.0
42.3
54.5
42.9
56.0
39.2
57.7
40.9
57.2
45.6
55.8
43.4
58.4
48.6
52.3
46.5
51.8
46.7
60.4
45.3
57.7
52.0
56.1
49.2
58.7
52.0
61.4
52.6
60.0
49.0
62.9
50.2
63.0
48.1
Future Market Indicator
Call
for Bids
OwnerRental
Occupied Properties
53.9
42.9
58.3
40.5
39.7
34.0
54.1
35.1
52.7
33.6
51.4
32.8
51.0
33.5
48.1
29.8
49.1
30.9
55.1
34.3
57.8
37.3
60.0
40.9
61.6
41.7
54.9
38.9
53.4
31.7
58.2
32.0
56.0
42.2
54.0
40.9
51.9
30.3
45.5
39.5
51.5
30.4
45.3
28.4
48.2
27.6
51.5
29.3
50.1
34.3
47.2
27.9
46.5
26.9
39.9
31.0
40.2
27.9
40.3
27.7
29.8
23.5
20.2
15.3
36.2
20.4
41.7
21.0
49.0
30.7
49.3
26.0
51.5
26.9
48.8
26.0
44.6
30.7
48.9
25.2
54.6
30.0
50.5
32.4
46.9
29.5
52.5
33.1
52.3
35.3
48.7
35.0
54.6
33.7
64.5
48.2
55.4
38.1
63.5
40.3
63.4
40.6
65.0
49.0
58.1
37.7
62.4
44.0
Note: Major Additions and Alterations are jobs valued at $25,000 or more; Minor Additions and Alterations are less than $25,000. Each component of the Remodeling
Market Index (RMI) is measured on a scale of 0 to 100. The overall RMI index is the average of the index for the Current Market Conditions and the index for the Future
Market Indicators. The Current Market Conditions is a weighted average of three indices: Major Additions and Alterations (weight 0.30), Minor Additions and Alterations
(weight 0.40) and Maintenance and Repair (weight 0.30).The Future Expectations Index is an average of four indices: Calls for Bids, Amount of Work Committed for
Next Three Months, Backlog of Remodeling Jobs, and Appointments for Proposals. Each index has equal weight, i.e. 0.25.
Source: NAHB Economics Group: Remodeling Market Index, Quarterly Survey of Remodelers, based on 352 responses, July 24, 2014.
October 10, 2014
6
Corporates
Housing Turnover
What began as an untypically moderate housing recovery has decelerated further since late
2013. But demographics, attractive housing valuations and a slow, steady easing in credit
standards should sustain and ultimately accelerate the upturn. Most of the latest macro
statistics are encouraging.
In the first eight months of 2014, existing home sales fell 5.7% while new home sales grew 2%.
New single-family housing starts increased 3.1% year-to-date compared with a year earlier.
Growing strength in the economy, employment and demographics should positively influence
housing in 2015. Total housing starts are projected to expand 16% to 1.185 million as
single-family starts increase 21% and multifamily volume gains 6.7%. New home sales should
improve more than 20%, while existing home sales rise 5%.
Trends in Existing Home Prices
National home price indices have been broadly increasing since early 2012. The average
existing home price in August 2014 was $265,200, a 3.4% increase from the previous August.
The median existing home price that month was $219,800, 4.8% greater than August 2013.
The August increase marks 30 consecutive months of year-over-year (YOY) median price
increases. According to the National Association of Realtors, the median price in August is
4.6% below the all-time record of $230,400 in July 2006. Three years ago, the median price
was 25.7% below the peak.
In 2003, the average home price was $222,200, 6.6% higher than in 2002. This price rose to
$244,400 in 2004, up 10.0%, and to $266,600 in 2005, ahead 9.1%. The price was $268,200 in
2006; $266,000 in 2007; $242,700 in 2008; $216,900 in 2009; and $220,000 in 2010. The
average existing home price was $214,000 in 2011, off 2.7% from a year earlier, and $225,400
in 2012, up 5.3%. The average existing home price rose 8.9% in 2013.
Sales Price of Existing Homes
U.S.
Northeast
Median
Midwest
South
West
U.S.
Year
2005
2006
2007
2008
2009
2010
2011
2012
2013
219,600
221,900
219,000
198,100
172,500
172,900
166,100
176,800
197,100
271,300
271,900
279,100
266,400
240,500
243,500
237,500
237,700
249,100
170,600
167,800
165,100
154,100
144,100
141,600
135,400
142,700
154,600
181,700
183,700
179,300
169,200
153,000
150,100
144,200
154,000
170,700
335,300
342,700
335,000
271,500
211,100
214,800
201,300
230,100
273,100
266,600
268,200
266,000
242,700
216,900
220,000
214,000
225,400
245,500
297,000
299,700
307,100
297,800
276,300
281,500
276,900
277,900
288,900
Not Seasonally Adjusted
August 2013
September 2013
October 2013
November 2013
December 2013
January 2014
February 2014
March 2014
April 2014
May 2014
June 2014
July 2014 – R
August 2014 – P
209,700
198,500
197,500
195,500
197,700
187,900
188,300
196,700
201,500
212,000
222,000
221,600
219,800
268,000
238,300
243,900
242,900
239,000
241,200
234,100
244,300
244,600
256,700
270,700
273,600
265,800
164,100
157,400
153,600
150,000
151,100
139,800
140,400
149,100
155,900
166,300
177,200
174,900
173,800
178,400
172,100
169,300
167,700
172,700
159,900
164,000
171,900
174,500
183,300
191,200
190,100
186,700
286,300
283,000
282,600
282,900
283,700
272,200
278,300
281,700
289,600
294,000
299,200
302,100
301,900
256,600
246,300
245,000
243,600
246,700
236,600
236,600
244,800
250,700
259,400
268,100
267,500
265,200
4.8
(0.8)
5.9
4.7
5.4
3.4
($)
Versus Last Year (%)
Average (Mean)
Northeast
Midwest
South
West
203,800
205,300
200,500
183,400
171,100
172,500
166,900
173,700
186,900
231,700
230,000
225,600
211,600
192,700
193,000
188,100
198,800
216,400
363,800
371,300
365,900
312,300
256,700
264,100
252,300
278,100
317,400
304,300
279,800
283,900
283,000
281,200
282,300
275,000
283,900
286,500
296,700
308,300
310,800
302,900
198,700
188,400
185,400
182,200
185,800
173,100
170,100
179,200
188,200
198,500
212,800
209,900
211,800
224,600
216,300
213,100
211,600
218,300
203,000
206,700
216,100
220,600
230,300
237,500
235,800
231,100
329,200
326,000
325,300
325,500
325,600
316,700
321,600
326,500
333,300
336,600
339,500
341,500
341,900
(0.5)
6.6
2.9
3.9
R Revised. P Preliminary.
Source: National Association of Realtors.
October 10, 2014
7
Corporates
The median home price was $180,200 in 2003, up from $166,200 in 2002. The national median
existing home price was $195,200 in 2004, an increase of 8.3%; $219,600 in 2005, up 12.5%;
$221,900 in 2006, a gain of 1.0%; and $219,000 in 2007, off 1.3%. The median home price
was $198,100 in 2008, down 9.5% from 2007; $172,500 in 2009, 12.9% lower than 2008; and
was $172,900 in 2010, 0.2% higher than 2009. The median home price was $166,100 in 2011,
3.9% lower than in 2010. The median home price was $176,800 in 2012, up 6.4%, and
reached $197,100 in 2013, 11.5% higher than the previous year.
Another gauge of home price appreciation is provided by the Federal Housing Finance Agency
(FHFA) index — formerly the Office of Federal Housing Enterprise Oversight’s index — which
measures average price changes from repeat sales or refinancings of the same single-family
homes with mortgages purchased or securitized by Fannie Mae or Freddie Mac. This index
was 211.84 in second-quarter 2014, up from 201.21 in second-quarter 2013, and up from
204.46 in fourth-quarter 2013. The average home price increase in second-quarter 2014 for
this index, annualized, was 3.24%. Home prices realized a quarterly appreciation of 0.81% in
second-quarter 2014. In 2008, there was a four-quarter decline in the Purchase-Only Index, as
there was in 2009 and 2010. Two of the four quarters in 2011 realized price appreciation. All
four quarters of 2012 and 2013 realized price appreciation.
Housing Outlook
2014 Expectations
Comparisons were challenging through first-half 2014, and so far this year most housing
metrics seem to have defied expectations and fallen somewhat from a year ago. Though the
severe winter throughout much of North America restrained some housing activity, there also
was an absence of underlying consumer momentum this spring and summer, perhaps due to
buyer sensitivity to home prices and finance rates and the slowing of job growth at year end.
But demographics, attractive affordability/housing valuations, and a slow, steady easing in
credit standards should sustain and ultimately accelerate the upturn.
To reflect the subpar spring selling season, as well as the more guarded expectation for the
next few months, Fitch tapered its macro housing forecast. Single-family starts are projected to
improve 9.5% to 677,000 (down from Fitch’s previous forecast of 15%) and multifamily volume
to grow almost 12% to 343,000. Total 2014 starts should slightly exceed 1 million. New home
sales are forecast to advance about 8% to 465,000 (down from Fitch’s prior forecast of
500,000), while existing home sales volume is expected to decline 6% to 4.785 million (down
from Fitch’s earlier estimate of 5.1 million), largely due to fewer distressed homes for sale.
New home price inflation should moderate in 2014, at least partially because of higher interest
rates. Average and median new home prices should rise about 3.5% in 2014.
2015 Expectations
Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily
growing economy throughout the year. The unemployment rate should continue to move lower
(averaging 5.8% in 2015). Credit standards should steadily, moderately ease throughout next
year. Demographics should be more of a positive catalyst. More of those younger adults who
have been living at home should find jobs and these 25- to 35-year-olds should provide some
incremental elevation to the rental and starter home markets. Single-family starts are forecast
to rise 21% to 819,000 as multifamily volume expands about 6.7% to 366,000. Total starts
October 10, 2014
8
Corporates
would be approaching 1.2 million. New home sales are projected to increase 20.4% to 560,000.
Existing home volume is expected to approximate 5.025 million, up 5%.
New home price inflation should further taper off with higher interest rates and the mix of sales
shifting more to first-time homebuyer product. Average and median home prices should
increase 2.5% 3.0%.
Challenges remain, including the potential for higher interest rates and continued restrictive
credit qualification standards. Fitch believes the housing recovery likely will occur in fits and
starts.
Housing’s Impact on Remodeling Spending
Housing turnover has significant implications for remodeling spending. Homeowners will
typically remodel when buying a home to either fix it up or customize it to their tastes. Potential
home sellers also tend to remodel to prepare their homes for sale. Fitch believes remodeling
spending is influenced to a major degree by housing turnover, especially in existing homes,
albeit on a lagged basis. However, there is also the maintenance/repair and replacement side
of remodeling spending, driven in part by the aging housing stock, as well as improvements to
homes where there is no change in ownership. Fitch believes these factors make the
remodeling market less overtly cyclical than the new home construction market.
Changes in residential improvement expenditures have roughly paralleled trends in new and
existing home sales (with home improvement spending lagging housing turnover). However, in
the past 30-plus years, annual residential improvement expenditures declined YOY only six
times (1982, 1991, 1995, 2007, 2008 and 2009), while new home sales decreased 18 times,
and existing home sales dropped 13 times. Home improvement spending declined 2.3% in
1982, while new and existing home sales dropped for four consecutive years (1979–1982).
Similarly, new and existing home sales declined from 1989–1991, while residential
improvement expenditures fell 6.7% in 1991. In addition, the contractions in home improvement
spending in 1982 and 1991 happened during recessions.
In 1995, home improvement spending fell 4.3%, while new and existing home sales declined
0.4% and 3.9%, respectively. New and existing home sales exhibited positive comparisons the
previous three years. The U.S. economy was booming in early 1994, and to slow the economy
to a sustainable growth rate and forestall higher inflation, the Fed raised interest rates eight
times from February 1994 through February 1995. Specifically, the Fed raised the Fed Funds
rate from 3% to 6%. The economy landed softly in 1995 with moderate growth of 2.5% and low
inflation. Residential improvement spending rebounded in 1996 and grew 5.1% over 1995
expenditures as real GDP improved 3.7%.
Fitch estimates home improvement spending was flat to slightly higher in 2010 following three
years of consecutive YOY declines. In the previous 30-plus years, the industry had not
experienced two (let alone three) consecutive years of declines. New home sales decreased
for six consecutive years during 2006–2011 while existing home sales fell for three straight
years from 2006–2008 before rebounding in 2009 and then falling again in 2010.
Fitch projects home improvement spending will increase 6% in 2014 following an estimated 5%
growth both in 2013 and 2012. The continued improvement in the housing market, as well as
strong home price appreciation seen last year and more moderate but steady price inflation in
2014, is likely to drive higher spending on home renovation projects in 2014 and 2015.
October 10, 2014
9
Corporates
Change in Residential Improvement Expenditures versus Change in
New and Existing Home Sales
(1976–2015)
Residential Improvement Expenditures
New and Existing Home Sales
(%)
50
40
30
20
10
0
(10)
(20)
(30)
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015E
E – Estimate. Note: Residential Improvement Expenditures — methodology change in 1984; 1984–current year based on consumer
expenditure surveys and are not comparable to 1983 and prior years. Percentage change for 2008, 2009, 2010, 2011, 2012 and 2013E and
2014E are based on Fitch estimates. Source: U.S. Bureau of the Census; National Association of Realtors; Home Improvment Research
Institute; Fitch forecast.
Employment, Personal Income and Consumption Trends
Employment
Nonfarm payroll employment continued to edge up in September 2014, adding 248,000 jobs
during the month. Over the prior 12 months, nonfarm employment growth averaged 213,000
per month. The unemployment rate declined to 5.9% in September from 6.1% in August and
has dipped 130 bps from 7.2% in September 2013. Fitch projects the unemployment rate to
average approximately 6.2% in 2014 and decline to an average of 5.8% in 2015.
Total Non-Farm Payroll and Unemployment Rates
(1975–2013)
Unemployment Rate
(Unemployment Rate, %)
Total Non-Farm Payroll
(Non-Farm Payroll, Mil.)
10
150
8
130
6
110
4
90
2
70
0
50
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Bureau of Labor Statistics.
Personal Income and Consumer Spending
Personal income exhibited an upward trend in late 2009, which continued in 2010, 2011, 2012,
2013 and so far in 2014. Personal income increased 0.5% sequentially in January 2014, grew
0.6% in February, 0.6% in March, 0.4% in April, 0.5% in May, 0.5% in June, 0.2% in July, and
0.3% in August. Disposable personal income advanced 0.6% in January, 0.6% in February,
0.6% in March, 0.5% in April, 0.5% in May, 0.5% in June, 0.2% in July, and 0.3% in August.
Consumer spending remained somewhat sluggish throughout 2009 and into 2010, and then
picked up momentum later in the year. Personal consumption expenditures grew 3.6% in 2010,
4.8% in 2011, 3.7% in 2012 and 3.6% in 2013. Real consumption expenditures expanded 1.9%
in 2010, 2.3% in 2011, 1.8% in 2012 and 2.4% in 2013. Real month-over-month growth
October 10, 2014
10
Corporates
averaged only 0.2% during the first eight months of 2014. Nominal growth averaged 0.3% for
that same period.
Personal Income and Expenditures
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Personal
Income
($ Bil.)
2,595.9
2,778.8
2,969.7
3,281.3
3,515.9
3,725.1
3,955.3
4,275.3
4,618.2
4,904.5
5,071.1
5,410.8
5,646.8
5,934.7
6,276.5
6,661.9
7,075.0
7,587.7
7,983.8
8,632.8
8,987.1
9,149.5
9,487.6
10,048.3
10,609.3
11,389.0
11,994.9
12,429.6
12,087.5
12,429.3
13,202.0
13,887.7
14,166.9
YOY %
Change
7.0
6.9
10.5
7.1
6.0
6.2
8.1
8.0
6.2
3.4
6.7
4.4
5.1
5.8
6.1
6.2
7.2
5.2
8.1
4.1
1.8
3.7
5.9
5.6
7.3
5.3
3.6
(2.8)
2.8
6.2
5.2
2.0
Disposable
Personal
Income
($ Bil.)
2,250.7
2,424.7
2,617.4
2,903.9
3,098.5
3,287.9
3,466.3
3,770.4
4,052.1
4,311.8
4,484.5
4,800.3
5,000.2
5,244.2
5,532.6
5,829.9
6,148.9
6,561.3
6,876.3
7,400.5
7,752.3
8,099.2
8,485.8
9,002.3
9,400.8
10,036.9
10,507.0
10,994.4
10,942.5
11,237.9
11,801.4
12,384.0
12,505.1
Seasonally Adjusted Annual Rates (% Change from Previous Quarter)
1Q08
12,360.6
1.5
10,831.2
2Q08
12,512.4
1.2
11,175.4
3Q08
12,472.1
(0.3)
11,029.7
4Q08
12,373.4
(0.8)
10,941.4
1Q09
12,054.4
(2.6)
10,858.9
2Q09
12,110.4
0.5
10,985.2
3Q09
12,059.5
(0.4)
10,933.0
4Q09
12,125.5
0.5
10,993.0
1Q10
12,187.1
0.5
11,041.5
2Q10
12,365.6
1.5
11,197.6
3Q10
12,496.1
1.1
11,286.7
4Q10
12,668.6
1.4
11,425.7
1Q11
13,025.1
2.8
11,652.2
2Q11
13,142.2
0.9
11,751.7
3Q11
13,294.8
1.2
11,876.6
4Q11
13,345.8
0.4
11,924.9
1Q12
13,650.7
2.3
12,186.0
2Q12
13,776.1
0.9
12,296.6
3Q12
13,828.9
0.4
12,323.8
4Q12
14,295.1
3.4
12,729.7
1Q13
13,977.2
(2.2)
12,340.4
2Q13
14,131.3
1.1
12,470.7
3Q13
14,247.4
0.8
12,585.8
4Q13
14,311.7
0.5
12,623.7
1Q14
14,484.7
1.2
12,772.9
2Q14
14,707.7
1.5
12,984.7
7.7
7.9
10.9
6.7
6.1
5.4
8.8
7.5
6.4
4.0
7.0
4.2
4.9
5.5
5.4
5.5
6.7
4.8
7.6
4.8
4.5
4.8
6.1
4.4
6.8
4.7
4.6
(0.5)
2.7
5.0
4.9
1.0
Personal
Consumption
Expenditures
($ Bil.)
1,937.5
2,073.9
2,286.5
2,498.2
2,722.7
2,898.4
3,092.1
3,346.9
3,592.8
3,825.6
3,960.2
4,215.7
4,471.0
4,741.0
4,984.2
5,268.1
5,560.7
5,903.0
6,307.0
6,792.4
7,103.1
7,384.1
7,765.5
8,260.0
8,794.1
9,304.0
9,750.5
10,013.6
9,847.0
10,202.2
10,689.3
11,083.1
11,484.3
1.6
3.2
(1.3)
(0.8)
(0.8)
1.2
(0.5)
0.5
0.4
1.4
0.8
1.2
2.0
0.9
1.1
0.4
2.2
0.9
0.2
3.3
(3.1)
1.1
0.9
0.3
1.2
1.7
9,974.4
10,095.8
10,124.9
9,859.6
9,770.2
9,769.8
9,890.8
9,957.1
10,044.5
10,137.7
10,233.4
10,393.2
10,523.5
10,651.4
10,754.5
10,827.9
10,959.7
11,030.6
11,119.8
11,222.6
11,351.1
11,414.3
11,518.7
11,653.3
11,728.5
11,870.7
YOY %
Change
YOY %
Change
7.0
10.3
9.3
9.0
6.5
6.7
8.2
7.3
6.5
3.5
6.5
6.1
6.0
5.1
5.7
5.6
6.2
6.8
7.7
4.6
4.0
5.2
6.4
6.5
5.8
4.8
2.7
(1.7)
3.6
4.8
3.7
3.6
0.6
1.2
0.3
(2.6)
(0.9)
1.2
0.7
0.9
0.9
0.9
1.6
1.3
1.2
1.0
0.7
1.2
0.6
0.8
0.9
1.1
0.6
0.9
1.2
0.6
1.2
YOY Year over year.
October 10, 2014
11
Corporates
Retail Sales
Advance estimates of U.S. retail and food service sales (excluding motor vehicles and parts)
for August improved 0.3% on a seasonally adjusted basis compared with July and grew 4.1%
relative to August 2013. For the three-month period ending August 2014, retail sales increased
1.2% versus the March 2014–May 2014 period and grew 3.8% compared with the same period
last year. For the first eight months of 2014, retail sales grew 2.8% compared with the same
period in 2013.
Advance estimates of sales from building materials and garden and equipment stores in
August 2014 were $28 billion on a seasonally adjusted basis, a 6.7% increase from the August
2013 estimate of $26.2 billion and 1.4% above the July 2014 estimate of $27.6 billion. On a
trailing-three-months basis from June 2014 through August 2014, sales from building materials
and garden and equipment stores grew 2.6% compared with March 2014–May 2014 and
advanced 5.9% compared with June 2013–August 2013. For the first eight months of 2014,
total sales of $221.6 billion for this segment grew 4.4% compared with the same period last
year.
Consumer Confidence
Consumer confidence, as measured by the Conference Board’s Consumer Confidence Index,
was on a consistent downward trajectory from early 2007 (111.2) until February 2009 (25.3).
As 2009 evolved, the index showed some recovery (albeit somewhat erratically), rising to 54.5
in August. The index slipped to 53.6 by year’s end. It dropped sharply in February 2010 (46.4)
from January (56.5), but then rose steadily the following three months, reaching 62.7 in May. At
the time, the index was particularly volatile, dropping as low as 48.6 in September 2010 and
rising to 72.0 in February 2011. Then the index started slipping, reaching 40.9 in October 2011.
Thereafter, it improved steadily, reaching 71.6 in February 2012, and then contracted to 61.3 in
August. The index next shot up to 73.1 in October 2012 and bottomed at 61.9 in March 2013
and then steadily rebounded to 82.1 in June. The index held steady in the low 80s for another
three months and then dipped to the low 70s. The index rebounded to 77.5 in December, 83.9
in March, 86.4 in June, 90.3 in July and 93.4 August. The index fell to 86.0 during the month of
September. The Expectations Index edged down to 83.7 in September from 93.1 in August.
Consumer Confidence Index
(1985 = 100)
(%)
120
100
80
60
40
20
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: The Conference Board.
October 10, 2014
12
Corporates
Construction Employment
Construction Employment Increasing
Construction is a meaningful portion of the U.S. economy and was an above-average
contributor to economic growth during the three years concluding in 2005, in terms of both
goods and services. During economic downturns, construction employment declines often
represented a substantial portion of total job losses. Conversely, growth of jobs within the
construction sector tends to be a relatively sizable contributor to total employment growth
statistics. In 2004, 2005 and 2006, construction employment’s shares of total employment
growth were 15.1%, 14.5%, and 13.2%, respectively. However, construction employment lost
61,000 jobs in 2007, 468,000 jobs in 2008, 1,146,000 jobs in 2009, and 498,000 jobs in 2010.
As the housing cycle stabilized and started to recover, 15,000 construction jobs were added in
2011, 113,000 in 2012 and 181,000 in 2013. Employment for residential remodelers grew
5,900 in 2011, 11,500 in 2012 and 14,400 in 2013 after losing 13,500 jobs in 2010; 37,600 in
2009; 21,700 in 2008 and 4,400 in 2007.
Currently, the construction unemployment rate stands at 7.0%, down from 8.5% a year ago and
11.3% in August 2012. Construction employment on a seasonally adjusted basis increased
16,000 in September and has been on an upward trend since the beginning of the year.
Employment for residential remodelers on a seasonally adjusted basis grew by 500 in
September compared with August and is up by 9,900 since December 2013.
Since the housing market’s trough in January 2011, the construction industry added 1.3 million
jobs. However, construction employment is still 21% below peak levels seen in 2006. With new
residential construction picking up and non-residential construction moderately improving, the
industry is positioned to become a job creator for all of 2014 and 2015. However, the
construction trade is typically a skilled workforce, so replacing qualified workers who left during
the downturn could be challenging. Some retired, some moved onto other higher-paying jobs,
and some left the country. The challenge may be to find qualified trades people, and at
affordable wages.
Construction Employment Trends
(000)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Construction Employment
Construction
Residential Remodelers
Civilian Employment
Employment
Civilian
Construction Construction Employment
Employment YOY Change YOY % Change Employment YOY Change YOY % Change Residential Remodelers YOY Change YOY % Change
117,718
(1,075)
(0.9)
4,780
(483)
(9.2)
171.9
(27.8)
(13.9)
118,492
774
0.7
4,608
(172)
(3.6)
163.9
(8.0)
(4.7)
120,259
1,767
1.5
4,779
171
3.7
173.9
10.0
6.1
123,060
2,806
2.3
5,095
316
6.6
187.2
13.3
7.6
124,900
1,840
1.5
5,274
179
3.5
188.5
1.3
0.7
126,708
1,808
1.4
5,536
262
5.0
198.7
10.2
5.4
129,558
2,850
2.2
5,813
277
5.0
208.1
9.4
4.7
131,463
1,905
1.5
6,149
336
5.8
218.5
10.4
5.0
133,488
2,025
1.5
6,545
396
6.4
239.5
21.0
9.6
136,891
3,403
2.5
6,787
242
3.7
247.1
7.6
3.2
136,933
42
0.0
6,826
39
0.6
233.8
(13.3)
(5.4)
136,485
(448)
(0.3)
6,716
(110)
(1.6)
243.0
9.2
3.9
137,736
1,251
0.9
6,735
19
0.3
254.7
11.7
4.8
139,252
1,516
1.1
6,976
241
3.6
272.7
18.0
7.1
141,730
2,478
1.8
7,336
360
5.2
288.7
16.0
5.9
144,427
2,697
1.9
7,691
355
4.8
310.2
21.5
7.4
146,047
1,620
1.1
7,630
(61)
(0.8)
305.8
(4.4)
(1.4)
145,362
(685)
(0.5)
7,162
(468)
(6.1)
284.1
(21.7)
(7.1)
139,877
(5,485)
(3.8)
6,016
(1,146)
(16.0)
248.1
(37.6)
(13.2)
139,064
(813)
(0.6)
5,518
(498)
(8.3)
234.6
(13.5)
(5.4)
139,869
805
0.6
5,533
15
0.3
240.5
5.9
2.5
142,469
2,600
1.9
5,646
113
2.0
252.0
11.5
4.8
143,929
1,460
1.0
5,827
181
3.2
266.4
14.4
5.7
YOY Year over year.
Source: U.S. Bureau of Labor Statistics.
October 10, 2014
13
Corporates
According to the U.S. Bureau of Labor Statistics, hourly wages for residential remodelers
increased only marginally during 2010–2012. However, hourly wages increased significantly
since the beginning of 2013, advancing 4.6% during the year compared with 2012. This trend
continued during the early part of 2014, with hourly wages growing 4.7% in January, 4.8% in
February and 3.1% in March. The growth rate decelerated during the second quarter of 2014,
with an average growth rate of 1.2%. For July and August 2014, hourly wages for residential
remodelers fell 0.2% and 2.1%, respectively, on a YOY basis. The wage inflation for residential
remodelers, together with higher costs for certain building materials, will likely push the cost of
remodeling projects higher.
Construction Workers’ Compensation Trends
Average Hourly Earnings
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
August 2014
August 2013
All Private
Production
Workers ($)
10.77
11.05
11.34
11.65
12.04
12.51
13.01
13.49
14.02
14.54
14.97
15.37
15.69
16.12
16.75
17.42
18.07
18.61
19.05
19.44
19.74
20.13
YoY%
Change
2.5
2.6
2.6
2.7
3.3
3.9
4.0
3.7
3.9
3.7
3.0
2.7
2.1
2.7
3.9
4.0
3.7
3.0
2.4
2.0
1.5
2.0
Construction
Workers ($)
13.81
14.04
14.38
14.73
15.11
15.67
16.23
16.80
17.48
18.00
18.52
18.95
19.23
19.46
20.02
20.95
21.87
22.66
23.22
23.65
23.97
24.22
20.50
20.02
2.4
2.1
24.93
24.35
YoY %
Residential
Change Remodelers ($)
1.2
11.97
1.7
12.13
2.4
12.35
2.4
12.72
2.6
12.92
3.7
13.59
3.6
14.29
3.5
14.76
4.0
15.28
3.0
15.81
2.9
16.09
2.3
16.97
1.5
17.72
1.2
17.22
2.9
17.27
4.6
18.02
4.4
18.69
3.6
18.98
2.5
19.08
1.9
19.14
1.4
19.17
1.0
20.15
2.4
0.4
20.21
20.65
YoY %
Change
2.1
1.3
1.8
3.0
1.6
5.2
5.2
3.3
3.5
3.5
1.8
5.5
4.4
(2.8)
0.3
4.3
3.7
1.6
0.5
0.3
0.2
5.1
(2.1)
7.7
Index (December 2005 = 100). YoY Year over year.
Source: U.S. Bureau of Labor Statistics.
Construction Materials
Materials Prices Continue Year-Over-Year Growth
The Producer Price Index (PPI) for materials and components for construction grew during
2013 and the trend has continued in 2014. Overall, the PPI for materials and components for
construction increased 2.2% year over year during July 2014 after rising 2.1% in June, 1.8% in
May, 1.4% in April, 1.8% in March, 1.6% in February and 1.6% in January. The index grew
about 2% for all of 2013 after rising 2.6% in 2012 and 3.5% in 2011. The index also has
increased sequentially month over month since November 2013.
October 10, 2014
14
Corporates
2004 2009
The construction industry saw steep price increases for a variety of materials from 2004–2006.
Prices for materials and components for construction, as compiled by the Bureau of Labor
Statistics’ PPI, grew 8.3%, 6.1% and 6.7% in 2004, 2005 and 2006, respectively. From
1990–2003, prices for construction materials and components increased on average about
1.7% per year. Price increases eased to 2.2% in 2007, but resumed an upward momentum,
rising 6.7% in 2008. The increase in crude oil prices in early 2008 pushed the price of
petroleum-based raw materials significantly higher, prompting producers to raise prices.
In 2009, the steep decline in new housing starts and drop in nonresidential construction
significantly decreased demand for building materials. The drop in demand, combined with
reduced input costs, resulted in lower prices for building products, particularly during secondhalf 2009. In 2009, the PPI for materials and components for construction fell 1.2%.
2010 2014
In 2010, prices for construction materials rose 1.4% compared with 2009. The materials and
components PPI for construction increased 3.5% during 2011, 2.6% in 2012 and 2.0% in 2013.
A similar trend has occurred during 2014: Prices grew moderately for a range of construction
materials during the first eight months of the year. In August 2014, insulation prices were
5.2% higher than in August 2013, while prices for gypsum products, cement, concrete products,
steel mill products, and lumber and plywood grew 7.7%, 5.6%, 4.2%, 4.3% and 11.0%,
respectively, on a YOY basis. Prices for architectural coatings were 1.0% higher while prices
for copper and brass mill shapes fell 1.1% YOY. Overall, the August 2014 PPI for materials and
components for construction increased 2.3% compared with August 2013 and grew 0.4%
relative to July 2014.
Materials Price Trends
Producer Price Index
(% Change)
Materials and Components for Construction
12 Months through December
2010
2011
2012
2013
To August 2014 from
July
May
August
2014
2014
2013
1.4
3.5
2.6
2.0
0.4
0.6
2.3
(3.4)
(2.3)
14.1
16.7
(0.9)
1.7
7.7
1.7
6.3
5.6
5.3
0.6
0.1
5.2
Architectural Coatings
(2.1)
4.6
12.0
(0.4)
0.0
(0.1)
1.0
Lumber and Plywood
10.9
(1.1)
5.1
12.9
1.5
1.5
11.0
Cement
(6.4)
(2.9)
1.5
4.6
0.0
0.1
5.6
Concrete Products
(1.6)
0.1
2.0
2.8
0.5
1.3
4.2
Steel Mill Products
16.0
12.8
(3.8)
(6.3)
0.3
1.0
4.3
Copper and Brass Mill Shapes
21.9
11.8
(8.4)
(4.6)
(0.7)
1.7
(1.1)
Aluminum Mill Shapes
11.6
0.6
(1.9)
(4.6)
3.1
3.7
8.4
Flat Glass
(3.3)
1.4
1.6
3.0
0.7
0.6
2.2
2.5
4.2
4.1
0.5
0.5
0.3
2.2
Gypsum Products
Insulation Materials
Plastic Construction Products
Source: U.S. Department of Labor, Bureau of Labor Statistics.
October 10, 2014
15
Corporates
Materials and Components for Construction
(YOY Annual Change in Producer Price Index)
(%)
8.3
9.0
3.0
6.7
6.1 6.7
6.0
4.3
3.5 4.0
1.3 1.3 1.6
1.1
2.0
0.2
1.4 1.2
0.5
3.5
2.2
1.5
1.4
2.6
2.0
2.3
1.7 1.7 1.6 1.5 1.6 1.6 1.8 1.5 1.8 2.1 2.2
0.0
(0.1)
(1.2)
(3.0)
Architectural Coatings
(%)
15.0
12.0
10.0
5.0
8.6 8.3
6.4
3.9
3.7
1.3 0.9 1.5
1.3
4.7
3.1 3.7
3.4
2.3 1.6
1.0 1.9
8.0 8.3
4.6
0.6 0.5 0.9
0.5
0.0
(0.4)
(2.1)
(5.0)
(0.9) (1.0)(0.9)(0.8)(0.7)(0.3)(0.5)(0.2) (0.0)
Plumbing, Fixture, Fitting and Trim
(%)
9.0
7.4
6.0
3.0
4.1
3.1 2.7 2.7
1.3
4.3
3.6
4.2
2.9
0.9 1.1
2.3
0.2
0.9
4.8
4.2
3.6
2.1
2.0
0.7 0.8
2.9
2.7 2.7 2.7 2.7 2.6 2.2
1.6 1.6 1.6 1.6 1.6 1.6
0.0
(3.0)
(0.9)
October 10, 2014
16
Corporates
Heating Equipment
(%)
8.0
6.3
5.9
6.0
4.5
4.2
4.0
2.0
1.4 1.5 1.7
1.6 1.5
1.3
0.9 1.1 0.7
4.0
3.2
3.2
2.6 2.6
3.9
2.8 2.9
1.8
1.5
0.7
2.1 1.7
1.4 1.4 1.4 1.3 1.3 1.6 1.5 1.6 1.5 1.6
0.0
Gypsum Product Manufacturing
(%)
23.8
30
20
10
13.4
7.6
1.3
18.5
15.114.4
16.0
10.1
3.7
0.2
12.514.9
7.6
14.4 13.7
14.4
12.1 11.5
12.9
9.3
1.3
8.2 7.2
4.8 3.5 6.8
0
(10)
(0.4)
(6.3)
(0.6)(2.8)(2.2)
(3.1)
(9.8)
(15.2)
(20)
(21.3)
(30)
Insulation
(%)
15.0
10.0
10.0
5.0
3.4
1.3 2.2
6.5
5.8 6.2
3.6
1.7
0.1
6.3 5.6 5.3
5.4
8.4
7.2 7.6 7.6 6.7 6.8
5.9
10.0
8.4 9.3 7.6
5.2
1.7 1.7
0.5 0.4
0.0
(0.8)
(2.4)
(1.0)
(5.0)
(10.0)
(3.1)(2.5)
(7.7)
Carpets and Rugs
(%)
7.9
9.0
5.9
6.0
3.0
4.5
1.3 0.8
2.2
1.6 1.9
1.4
2.2
0.4
2.7 2.3
0.9
0.2
1.2
3.8
2.1
0.8
2.1
2.0
0.6
2.7 3.0
3.8
2.1
4.8
3.2
4.0
1.9
2.5
1.6
0.0
(3.0)
(0.4) (0.8)
(1.4)
(0.3)
October 10, 2014
17
Corporates
Lumber and Wood Products
(%)
18.7
20
15
11.0
10.3
10
5
4.4
3.4
1.3 1.9
2.5
5.4
2.4
1.0
0.5
6.6
3.5
5.5 6.8 6.0 5.4 4.5 4.2
5.2 5.8 5.6
3.5 2.3 4.0
0
(1.1)(1.1)
(5)
(2.6)
(1.1)(1.0)(0.6)
(4.4)
(0.6)
(2.9)(2.1)
(10)
Hardwood Flooring
(%)
20
14.0
15
9.4
10
5
13.2
10.010.8
10.5 9.9
5.5
15.6
5.2
1.3
0.3
16.7 16.5 16.7
14.7
13.3
11.5 12.0
8.1 8.1 7.9
6.1
1.4
0.1
0
(5)
(0.8)
(4.6)
(2.3)
(10)
(0.5)
(4.0)
(6.1)
(0.1)
(0.6)
(2.6)
(4.6)(3.9)
Asphalt Shingle and Coatings Materials Manufacturing
(%)
30
24.3
18.2
20
10.110.2
10
1.3 1.8
4.3
0.6
4.4 3.1 3.1 4.7
1.1 0.5
5.0
1.2
1.1
0.5
0.3
2.4
2.6 1.4
1.0
0
(0.2)(0.2)
(1.3)
(1.9)
(10)
(0.4) (0.7)(1.1)(0.7)
(1.2)
(4.9)(4.7)
(6.8)(6.7)
Wood Kitchen Cabinets
Stock
(%)
5
6.0
4.0
2.0
3
1
4
4
3
3
1
44
Custom
6
5
3
4
3
3
2
22 2
2 12 2
1
2
4 4
2
2
1
4
4
3 33
3
22
2
33
3
3
4
33 3
4
4
3
54
3
4
34
3
4
3
4
4
3
3
4
4
3
11
1
0.0
(2.0)
(1)
(0)
October 10, 2014
18
Corporates
Credit Environment
Historically, home equity loans and home equity lines of credit (HELOCs), as well as “cash-out”
refinancing have been important sources of funding for home improvement spending,
particularly for larger and more expensive projects. When the housing market was booming,
getting approved for a home equity loan or line of credit was fairly simple. During 2004–2006,
strong housing appreciation, historically low interest rates and a desire to convert accumulated
home equity into spendable funds led many homeowners to refinance their mortgages or take
out home equity loans, giving them more money to spend.
This has not been the case the past few years. Bank lending standards remain tight, making it
difficult for homeowners to use credit to finance remodeling projects. Cash-out refinancings
also have declined significantly the past few years and remain considerably below the peak
level recorded in 2006.
Home Equity Loans and HELOCs
Borrowings under home equity loans have declined since 2008. According to the Fed’s Flow of
Funds report, outstanding home equity loans fell $18.5 billion in 2008, $82.5 billion in 2009,
$104.8 billion in 2010, $75 billion in 2011, $83.9 billion in 2012 and $66.7 billion in 2013. During
second-quarter 2014, total home equity loans on a seasonally adjusted basis declined
$44.9 billion from second-quarter 2013 levels. The home equity loan balance of $685.6 billion
at the end of second-quarter 2014 is roughly 38% below the peak level of $1.1 trillion recorded
during fourth-quarter 2007.
Home equity loans and HELOCs are often used to finance major expenses such as home
renovations, medical bills or college education. According the Census Bureau’s 2011 American
Housing Survey (AHS Report), published March 2013, approximately 54% of HELOC dollars
were used for home additions, improvements and repairs in 2011. This percentage grew from
51% in 2009, 49% in 2007 and 48% in 2005.
Cash-Out Refinancing Remains Weak
Cash-out refinancing dropped significantly from the record levels reported during 2006. Freddie
Mac estimates homeowners pulled roughly $31.2 billion of equity out of their homes through
refinancing of prime first mortgage liens during 2013, a 90.3% decline from the record
$320 billion extracted in 2006.
According to Freddie Mac, cash-out borrowers (those who increased their loan balance by at
least 5%) represented 21% of all refinance loans during second-quarter 2014 compared with
17% during the first quarter and 15% from the same time last year. By comparison, the
average cash-out share during 1985–2008 was 50% and the peak was 89% during
third-quarter 2006.
During second-quarter 2014, about $7.8 billion of home equity was cashed out by homeowners
when they refinanced their conventional prime-credit home mortgages, up from $5.0 billion in
the first quarter, but substantially less than the $83.7 billion of cash taken out during the peak
reported in second-quarter 2006. Adjusting for inflation, Freddie Mac pointed out annual
cash-out volumes from 2010 through 2013 have been the smallest since 1997. Fitch believes
cash-out refinancing activity will continue to be constrained in the intermediate term due to low
homeowners’ equity and, although slightly loosening, still tight lending standards.
October 10, 2014
19
Corporates
Office of the Chief Economist Cash-Out Refinance Report
Annual Cash-Out Volume for All Prime Conventional Loans
($ Bil., As of 2Q14)
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013E
Quarterly Information
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13E
2Q13E
3Q13E
4Q13E
1Q14E
2Q14E
Total Cash-Out Dollars
as a Percentage of
Aggregate Refinanced
Originations UPB (%)
4.2
7.2
7.5
8.4
8.6
6.1
9.0
11.5
8.7
8.0
7.2
13.0
21.5
29.2
26.0
17.5
8.0
4.5
4.1
2.8
3.7
Total Home Equity
Cashed Out
19.9
13.8
11.2
17.4
21.4
39.9
37.0
26.2
82.9
111.1
147.5
143.2
262.6
320.0
239.4
95.7
73.2
33.1
26.9
29.4
31.2
Volume of Cash-Out
and Second Mortgages/
HELOC Consolidation
39.3
29.2
21.7
34.5
39.1
72.4
71.1
60.4
135.5
170.5
226.2
187.2
301.2
348.2
267.9
117.4
107.5
61.7
53.2
63.5
63.2
14.9
18.3
23.3
14.1
8.6
8.1
8.5
5.9
5.8
5.6
3.8
3.4
4.5
5.0
3.7
3.2
2.9
2.5
2.8
2.9
3.3
3.5
3.7
4.6
5.3
6.6
33.7
31.4
18.5
12.1
22.9
24.6
15.4
10.3
7.3
7.3
8.5
9.9
7.1
5.5
6.3
8.0
7.0
5.9
7.7
8.8
8.5
9.4
6.5
6.7
5.0
7.8
41.7
38.0
21.8
16.0
32.1
34.8
22.0
18.5
11.5
11.8
16.5
21.8
12.5
9.5
12.8
18.2
14.4
13.0
16.4
19.7
17.9
18.7
13.3
13.4
9.1
13.0
E Indicates the value is an estimate and is subject to revision. UPB – Unpaid principal balance.
HELOC – Home equity lines of credit.
Source: Freddie Mac.
Mortgage Rates Are Higher but Remain Very Attractive
Thirty-year mortgage rates increased to an average rate of 3.98% during 2013 after averaging
3.66% in 2012. The most recent Freddie Mac average mortgage rate was 4.19%, down 1 bp
from the previous week but about 86 bps higher than the average rate during January 2013, a
recent low point for mortgage rates.
While the current rates are still below historic averages, the increase in mortgage rates during
the past year and a half has negatively affected refinancing activity. According to Freddie Mac,
the refinance share of mortgage activity during second-quarter 2014 fell below 50% for the first
time since third-quarter 2008. According to the Mortgage Bankers Association (MBA), refinance
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activity during July 2014 fell 2.6% compared with the previous month and is 42.9% lower from
a year ago. Refinance activity has shown 14 months of year-over-year decreases. The MBA
forecasts a 60% decline in refinance originations during 2014 and an additional 7% decrease in
2015. The decrease in refinancing activity could further constrain cash-out refinancing.
Monthly Average Commitment Rate — 30-Year Conventional Fixed-Rate Mortgage
(%)
20
16
12
8
4
0
Source: Freddie Mac.
Renovation Spending Tied to Cash-Out Refinancing
According to the latest AHS Report, approximately 50% of homeowners who refinanced their
primary mortgage and received cash (median amount of $26,000) from the transaction used a
portion of those proceeds for home additions, improvements or repairs. Roughly 31% of those
who received cash as part of the refinancing spent 50% or more of the cash received for
renovation projects while 18% used all the proceeds for home remodeling.
According to a Federal Reserve survey on mortgage refinancing activity in 2001 and early 2002,
many homeowners liquefied some of the equity they accumulated in their homes by borrowing
more than they needed to pay off their mortgage and cover the transaction costs of the
refinancing. These homeowners used the funds raised in cash-out refinancing to make home
improvements, repay other debts or purchase goods and services or other assets. For
homeowners in the survey who refinanced in 2001 and the first half of 2002, repayment of
other debt was the most common use of funds, accounting for about 51% of the loan volume.
Paying for home improvements was cited by 43% of those who took out cash.
In terms of dollars (rather than volume of loans), homeowners who took cash out from
refinancing spent about 35% of liquefied equity on home improvements and used 26% to pay
off debt. Of the 35% of liquefied equity spent for home improvement, the average amount spent
was about $20,530. The survey also indicated nearly 40% of homeowners who extracted
equity during that period took out more than $25,000.
Cash Received in Primary Mortgage Refinance
# of Homeowners Who Received Cash in Primary Mortgage Refinance
Median Cash Received ($)
% Who Used Cash for Home Additions, Improvement or Repairs
% Who Used 50% or More of Cash Proceeds for Home Additions, Improvements and Repairs
% Who Used 100% of Cash Proceeds for Home Additions, Improvements and Repairs
2005
2,375,000
28,084
55.7
39.3
23.5
2007
2,209,000
31,275
55.9
35.5
18.7
2009
1,587,000
30,000
54.6
41.5
26.8
2011
2,543,000
26,000
49.4
30.9
18.0
Source: American Housing Survey — 2005-2011 (Table 3-15).
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Home Equity Underwriting Standards Easing but Remain Tight
The Fed’s latest (July 2014) quarterly Senior Loan Officer Opinion Survey on Bank Lending
Practices found about 87.3% of domestic respondents reported no change in their standards
for approving applications for revolving HELOCs the past three months. The survey also noted
some net easing of standards on HELOCs, with about 8.5% of respondents easing standards
and 4.2% tightening standards. The July survey is the seventh consecutive quarter in which the
survey showed a net easing. The survey indicated about 33.8% of banks reported demand for
revolving HELOCs were moderately stronger the past three months as well. This compares
with generally weaker demand reported during the past two quarters.
Underwriting for Consumer Loans Slightly Easing
Based on the Senior Loan Officer Opinion Survey on Bank Lending Practices, credit
underwriting standards for consumer loans seem to be easing as well, as 17.1% of banks
surveyed indicated they are somewhat more willing to make consumer installment loans now
than three months ago while 1.4% were less willing. About 81.4% of the respondents indicated
no change in their willingness to make consumer installment loans. According to the survey,
13% of banks indicated standards for approving applications for credit cards eased, while 87%
reported no change. Similarly, about 8.5% indicated underwriting standards for other consumer
loans (other than credit cards and auto loans) eased, while 90.1% reported no change and
1.4% tightened standards. Underwriting standards for both credit cards and other consumer
loans have shown a net easing since the latter part of 2010.
Senior Loan Officer Opinion Survey on Bank Lending Practices
(Survey Regarding Revolving Home Equity Lines of Credit)
(%)
January 2008
April 2008
July 2008
October 2008
January 2009
April 2009
July 2009
October 2009
January 2010
April 2010
July 2010
October 2010
January 2011
April 2011
July 2011
October 2011
January 2012
April 2012
July 2012
October 2012
January 2013
April 2013
July 2013
October 2013
January 2014
April 2014
July 2014
Bank’s Credit Standards for Approving Applications for
Revolving Home Equity Lines of Credit Over the Past Three Months
Remained
Tightened
Unchanged
Eased
59.3
40.7
70.3
29.6
80.4
19.6
78.9
19.2
1.9
57.7
42.3
50.0
50.0
35.9
60.4
3.8
32.2
67.9
9.3
88.9
1.9
7.3
80.0
12.7
92.9
7.1
14.3
82.1
3.6
9.1
85.5
5.5
1.9
90.7
7.4
1.9
88.7
9.4
2.0
94.0
4.0
5.5
89.1
5.5
5.4
91.1
3.6
1.6
96.8
1.6
9.2
87.7
3.1
4.5
89.4
6.1
3.1
90.8
6.2
2.9
92.6
4.4
2.8
88.4
8.7
4.2
88.7
7.0
7.1
84.3
8.6
4.2
87.3
8.5
Demand for Revolving Home Equity Lines of Credit
Over the Past Three Months
Weaker
46.3
37.1
33.3
42.3
40.4
50.0
28.3
39.3
48.1
38.1
14.3
25.0
21.8
33.4
26.4
32.0
23.6
16.1
15.9
12.3
21.2
21.5
11.8
13.0
19.7
27.1
7.0
About the Same
44.4
44.4
43.1
38.5
38.5
28.8
56.6
53.6
44.4
50.9
73.2
55.4
69.1
53.7
54.7
64.0
70.9
71.4
61.9
69.2
68.2
70.8
63.2
65.2
63.4
52.9
59.2
Stronger
9.3
18.6
23.5
19.2
21.1
21.1
15.1
7.1
7.4
10.9
12.5
19.7
9.1
13.0
18.9
4.0
5.5
12.5
22.2
18.5
10.6
7.7
25.0
21.7
16.9
20.0
33.8
Source: Federal Reserve.
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Net Percentage of Domestic Banks Tightening Standards for Consumer Loans
Credit Cards
(%)
Other Consumer Loans
75
50
25
0
(25)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Other Consumer Loans excludes autos starting in the second quarter of 2011.
Source: The Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices.
Household Net Worth Increasing
Household net worth, the difference between the values of households’ assets and liabilities,
was $81.5 trillion at the end of second-quarter 2014, about $1.4 trillion more than at the end of
the first quarter, according to the Federal Reserve’s Second Quarter 2014 Flow of Funds
Report. In the second quarter, the value of residential real estate owned by households
increased about $170 billion, while the value of corporate equities and mutual funds increased
more than $937 billion. Since reaching a five-year low of $55 trillion in first-quarter 2009, net
worth improved by $26.5 trillion and is now $13.6 trillion above the previous record high of
$67.9 trillion reached in the quarter ended June 2007, six months before the recession began.
Household Net Worth
($ Trn.)
100
80
60
40
20
Source: Federal Reserve Flow of Funds Report (Includes households and nonprofit organizations).
Household Assets
Corporate Equities and Mutual Funds
Real Estate
($ Trl.)
25
20
15
10
5
0
Source: Federal Reserve Flow of Funds Report.
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Remodeling Market Drivers
Homeownership Rates
Homeownership rates rose steadily through the 1990s and into the early part of this century.
Demographics (specifically, aging baby boomers), low finance rates, attractive lending terms,
government support programs and the attraction of housing as an investment all encouraged
homeownership into the 2000s. More recently, the recession, followed by a sluggish economy
and tighter lending, have discouraged homeownership.
Rates averaged 67.8% in 2001, up from 67.4% in 2000 and 63.9% in 1990. The
homeownership rate averaged 68.0% in 2002, 68.3% in 2003, 68.8% in 2004, 68.9% in 2005,
68.8% in 2006, 68.2% in 2007, 67.8% in 2008 and 67.4% in 2009. The homeownership rate
was 67.1% in first-quarter 2010, edged down to 66.9% in the second and third quarters, then
dropped to 66.5% in fourth-quarter 2010.
The rate of homeownership slipped to 66.4% in first-quarter 2011 and 65.9% in the second
quarter. It then bumped back up to 66.3% in the third quarter but fell to 66.0% in the fourth
quarter. The homeownership rate was 65.4% in first-quarter 2012, 65.5% in the second and
third quarters and 65.4% in the fourth quarter. The rate decreased to 65% in first-quarter 2013
and was unchanged in the second quarter. The homeownership rate bumped up to 65.3% in
the third quarter and was 65.2% in the fourth quarter. The rate declined to 64.8% in first-quarter
2014 and 64.7% in the second quarter.
Overall, the homeownership rate is down 4.5 percentage points since the peak in mid-2004.
While homeownership rates have trended lower for all age groups, the steepest declines have
occurred among young householders under the age of 45, especially since 2008. From
fourth-quarter 2008 to second-quarter 2014, the drop was 7.4 points for households headed by
those in the 35- to 44-year age bracket and 5.3 points for those below 35.
Homeownership may continue to edge downward over at least the next year, partially because
foreclosures are still forcing some current owners out of the ownership stock and credit
conditions remain tight. Historically, surveys suggest the public has viewed homeownership as
a sound investment, as it is the best opportunity for most families to create wealth for the long
term. Of course, many potential homebuyers are choosing to delay purchase because of
employment uncertainty. In the future, it will be increasingly challenging to raise ownership
back to former highs, or above the 70% level, especially if somewhat tighter lending standards
prevail and the government does not emphasize homeownership.
Total Housing and Homeownership Rates
(1985–2013)
Total Housing Units (RHS)
Homeownership Rate (LHS)
(%)
(Mil.)
70
150
66
130
62
110
58
90
54
70
50
50
Source: U.S. Bureau of the Census.
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Homeownership — Inevitably Trending Downward?
Various surveys from the past few years suggest homeownership will be less attractive to
Americans in the future, but some recent surveys have been more encouraging. The
homeownership rate has gradually, but for the most part steadily, receded since reaching
69.2% in fourth-quarter 2004. A Goldman Sachs Group, Inc. study, issued during first-half 2012,
projects the homeownership rate should bottom near 64% in 2014 from 65% currently. Capital
Economics also projects a trough in homeownership at 64% within a year or so.
Clearly, the recession and tighter lending standards have discouraged homeownership in
recent years. During the last five years of the 1990s and first five years of the 2000s, public
policy and increasingly liberal lending standards (especially by government-sponsored
enterprises and FHA) created an opportunity for less creditworthy Americans to own homes.
Prior to 1995, homeownership rates held steady in the low to mid-60s.
Fitch expects that so long as the economic environment remains constrained, the ownership
rate may continue to drift downward. Conversely, a more traditionally robust economy is likely
to at least stabilize the homeownership rate.
Zillow’s Housing Confidence Index
On Sept. 22, 2014, Zillow Real Estate Research released the first edition of its Zillow Housing
Confidence Index. The index is designed to offer insights into homeowners’ and renters’
intentions and attitudes concerning the housing market and to be a forward-looking gauge of
the housing market health. Survey highlights include:
Roughly 82% of young adult renters aged 18 to 34 are “confident” or “somewhat confident”
that they will eventually be able to afford a home. About 16% of this cohort said that they
are “not confident” or “somewhat unconfident.” For adult renters ages 35 49, 64%
responded that they are “confident” or “somewhat confident” that they will eventually be
able to afford a home while 33% are “not confident” or “somewhat unconfident.”
About 36% of renters surveyed ages 18 34 said they expect to buy a home within the next
year and about 54% said they expect to buy a home in one to two years or three to five
years. For renters ages 35 64, 55% said that they expect to buy a home within the next
year and 43% 44% said that they expect to buy a home in one two years or three five
years.
Approximately 65% of renters ages 18 34 think that owning a home is necessary to live
“The Good Life” and the “American Dream.” For renters ages 35 49, 56% think that
owning a home is necessary to live “The Good Life” and the “American Dream.” About
55% of renters ages 50 64 and 62% of 65 and older renters share this view.
When it comes to assessing whether owning a home is the best long-term investment,
65% of 18- to 34-year-old renters responded favorably compared with 59% for renters in
the 35 49 age group, 61% for the 50 64 age group and 68% for those 65 and older
renters.
When asked about their expectations for home value appreciation over the next decade,
about 33% of renters ages 18 34 said that they expect home values to increase by at
least 7% per year over the next decade. This compares to 21% for renters in the 35 49
age group, 15% for 50- to 64-year-olds and 10% for those 65 or older.
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Fannie Mae National Housing Survey
Fannie Mae’s Monthly National Housing Survey polls the adult U.S. general population to
assess their attitudes about homeownership, renting a home, the economy and household
finances. The survey polls a nationally representative sample of 1,000 respondents ages 18
and older.
According to the September 2014 survey, 66% of respondents indicated they will buy a house
if they were moving while 28% said that they will rent. Since Fannie Mae has collected this data
in 2010, 66%, on average, have responded saying that they will buy a house compared with
30% who indicated that they will rent if they moved.
Share of Respondents Who Say They Would Buy or Rent
if They Were Going to Move
Buy
(%)
Rent
80
70
60
50
40
30
20
6/10
9/10 12/10 3/11
6/11
9/11 12/11 3/12
6/12
9/12 12/12 3/13
6/13
9/13 12/13 3/14
6/14
9/14
Source: Fannie Mae National Housing Survey.
BMO Harris Bank Study
In mid-June 2014, BMO Harris Bank released a survey of Americans that found almost
three-quarters of millennials plan to purchase a home in the next five years. The study showed
the likelihood to buy is highest among millennials, and increases with a longer timeline for
purchase. Also, 16% of Americans planning to buy in the next five years are first-time buyers.
According to the study, two-thirds of respondents currently own and one-third rent. The top
three reasons homeowners cited for owning rather than renting were having somewhere to call
their own (67%), long-term investment (64%) and more stability and certainty (62%). The top
three reasons people cited for renting rather than owning were financial instability (59%), less
upkeep (30%) and difficulty finding affordable homes in the right location (27%). Some rented
for financial reasons — 12% said it was less expensive in the long run, and 11% said they were
concerned about home prices falling. Of current renters, 12% say they prefer to rent and never
plan to buy; 32% said they would like to buy but are not able to afford it.
Prudential Real Estate Consumer Outlook Survey
In May 2014, Prudential Real Estate released the results of its first-quarter 2014 Consumer
Outlook Survey indicating that consumers’ perception of the residential real estate market is
increasingly positive. Overall, 77% of consumers have a favorable view of housing, with
millennials showing the highest favorability at 85%. According to the survey, respondents also
indicated that they are focused on homeownership and its related opportunities, with nearly
70% saying that they are committed to buying or selling a home now.
According to Prudential, as the U.S. economy continues its slow, steady recovery, more people
are gaining confidence in their personal situations and are taking a longer look at
homeownership’s possibilities.
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The survey also pointed out that respondents cited higher-than-expected home prices as the
top reason why it may be more difficult to buy a home now. Additionally, 76% of consumers
believe that pent-up demand will create further competition for existing homes. The survey also
indicated that 83% of the respondents said that they plan on buying sooner rather than later,
before interest rates rise.
American Express Spending and Saving Tracker
According to the March 2014 American Express Spending and Saving Tracker survey, more
Americans plan to buy a home than rent, reversing a 2013 trend. According to the survey, 16%
of consumers are planning to move this year, up from the 15% in 2013 and 10% in 2012. Of
those planning to move, about 46% plan to purchase a new home, condo or apartment, while
44% are planning to rent. By comparison, in 2013, 43% of movers planned to buy while 47%
planned to rent. About 10% of those surveyed were not sure for both years.
JCHS Analysis
In mid-August 2012, the Harvard JCHS published an analysis of individuals’ views on
homeownership and experiences with recent housing market distress. Using data from Fannie
Mae’s National Housing Survey collected in 2010 and 2011, this analysis finds little evidence to
suggest individuals’ preferences for owning compared to renting a home have been
fundamentally altered by their exposure to house price declines and loan delinquency rates, or
by knowing others in their neighborhood who defaulted on their mortgages.
The exceptions are underwater owners, who are less likely to expect they will own in the future,
and owners who know a strategic defaulter, who are less likely to view owning as financially
preferable to renting. Instead, this analysis finds individual characteristics, and in particular
whether one is already an owner or renter, to be the strongest predictors of post-recession
demand for homeownership.
Ramifications for Improvement Spending
Homeownership is an important driver for the home improvement industry. According to the
JCHS, approximately 82% of home improvement and repair spending in 2011 was on owneroccupied homes, with more than 25% of these owner-occupied expenditures directed toward
discretionary projects. More importantly, owner-occupants typically spend nearly five times as
much on improvements per year on average as owners of renter-occupied units. Based on
data from the JCHS, the average improvement spending on owner-occupied properties was
$2,370 per unit in 2011, compared with $500 per rental unit the same year.
Average Annual Improvement Spending per Unit
(2011)
Owner
Rental
($)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2001
2003
2005
2007
2009
2011
Source: Joint Center for Housing Studies of Harvard University. The U.S. Housing Stock: Ready for Renewal.
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Age of the U.S. Housing Stock
The increasing age of the U.S. housing stock Age of the U.S. Housing Stock — 2011
provides strong, long-term support to the (Year Structure Built)
remodeling market. Occupied homes 25
2005–2011
1939 and Earlier
7%
years or older represented approximately
15%
39% of the total U.S. housing stock in 1985.
1990–2004
By 2011, this figure increased to about
22%
1940–1959
63.3%. The median age of the U.S. housing
16%
stock is 37 years. According to the Census
Bureau, expenditures for owner-occupied,
1975–1989
1960–1974
one-unit properties totaled $168.4 billion in
21%
19%
2007. Of this amount, $93.8 billion, or 55.7%,
was spent on properties built before 1980. Source: American Housing Survey of the United States — 2011.
(This is the most current residential improvement and repair data available from the Census
Bureau.)
Higher Spending on Older Homes
A 2011 JCHS report, A New Decade of Growth for Remodeling, indicated that, as a group,
homeowners in the largest metropolitan areas with the newest housing stocks spent about 17%
less on remodeling than the 35-metropolitan average from the study. According to the report,
homeowners in areas where the median home was built in the 1980s spent $2,400 on average
each year, while those homeowners in areas with older housing spent an average of about
$3,300.
Need for Newer Amenities
Older homes typically need more remodeling work. Owners of older homes also tend to
upgrade and modernize the appearance and structure of their homes. This housing segment
suffers from older amenity standards and deteriorating components, factors that favorably drive
remodeling spending. According to the first-quarter 2012 RMI survey, remodelers indicated the
need to repair/replace old components and the desire for better/newer amenities were the top
reasons given by homeowners for remodeling their homes.
Home Improvement Tax Credits
On Oct. 3, 2008, President George W. Bush signed into law the Emergency Economic
Stabilization Act of 2008, which gave consumers new and renewed tax incentives for energyefficient homes. These incentives originally were enacted as part of the Energy Policy Act of
2005, which offered consumers federal tax credits beginning in January 2006 for purchasing
energy-efficient appliances and products. On Feb. 17, 2009, President Barack Obama signed
into law the American Recovery and Reinvestment Act of 2009, which, among other things,
extended the tax credits previously effective for 2009 into 2010.
Tax Credits Lowered in 2011
On Dec. 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010. This law extended the tax credits for energy
efficiency into 2011, although at lower levels compared to 2009 and 2010. The levels revert
back to those in effect in 2006 and 2007, which were 10% of the cost of the improvement, up to
a $500 tax credit per homeowner. By comparison, the 2009 and 2010 tax credits provided
consumers who purchased and installed specific products — such as energy-efficient windows,
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insulation, doors, roofs and heating and cooling equipment — in their primary residences a tax
credit equal to 30% of the product cost, up to $1,500.
2012 and 2013 Energy-Related Tax Credits
In January 2013, federal tax credits for energy-efficient home improvement projects were
reinstated as part of the American Taxpayer Relief Act of 2012. Absent this reinstatement, tax
credits for qualifying energy-efficient home improvements, such as HVAC equipment, water
heaters, roofing, doors, windows, and biomass stoves, which were eligible for up to 10% of the
cost (up to $500) during 2011 (Residential Energy Efficiency Tax Credit), would have been
eliminated. More importantly, Congress made these credits retroactive, allowing homeowners
who had energy-efficient projects in 2012 eligible for the tax credit. The Residential Energy
Efficiency Tax Credit expired on Dec. 31, 2013.
Until 2016, homeowners who install solar, geothermal or wind systems to generate electricity or,
in some cases, heat water, are eligible for a tax credit worth 30% of the cost of the system, with
no upper dollar limit (Residential Renewable Energy Tax Credit). Homeowners also can
receive a tax credit for up to 30% of the cost, up to $500 per 0.5 kilowatts of power generated.
Added Incentive for Homeowners
In addition to helping consumers lower their energy bills at home, the federal tax credits
provide additional incentive for homeowners to complete certain home improvement projects.
Energy Tax Credit Projects Have Grown
Going “green” has become a popular trend in new home construction as well as home
remodeling. More homeowners are focusing on energy efficiency in their homes, particularly
when energy prices escalated during 2008. According to the JCHS, remodeling contractors are
increasingly targeting energy-related projects and the growth potential they hold. A JCHS
survey indicated that between mid-2009 and mid-2010, the share of home improvement
contractors reporting they worked on projects eligible for federal energy tax credits jumped
from less than 40% to almost 60%. The survey pointed out, in general, homeowners have
focused primarily on small-scale green projects that offer a quick payback. Only a small
minority of contractors reported that they installed more expensive renewable energy systems.
According to Angie’s List (a provider of research and review of local service providers), green
home improvements ranked sixth among the top home remodeling and interior design trends
for 2014. Angie’s List said that while green home improvements have been trendy for years,
remodelers and designers say homeowners continue to strive to improve the efficiency of their
homes, from installing home automation systems that prevent energy waste to replacing
outdated light bulbs and shower heads.
According to the Houzz & Home Survey published in May 2014, 30% of respondents indicated
that making their homes more energy efficient was the most important factor in their decision to
complete their most recent project.
This trend is also evident in the NAHB’s Remodelers Survey released in April 2014, which said
that improved availability and affordability of high-performing products means energy-efficient
features are being incorporated into more home improvement projects. The most popular green
building features in the survey are: high performance windows, including Low-E and Argon gas
windows; high efficiency HVAC systems; programmable thermostats; and ENERGY STAR
appliances. Other popular features include ceiling fans, moisture-control products, waterconserving fixtures and high-performance insulation.
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Project Trends/Return on Investment
Project Returns Continue Positive Trend
The home improvement industry has shown an increase in the cost recouped from home
improvement projects for the second straight year after six years of declining overall returns.
According to the Cost Versus Value survey conducted by Remodeling magazine, the overall
return for remodeling projects improved to an average of 66.1% in 2014 from 60.6% in 2013
and 57.7 in 2012. The survey indicated that after a record-breaking year in 2005, the trend in
cost recouped for all projects dropped more than 10 points in 2006 to 76.1. Overall returns fell
further to 70.1% in 2007, 67.3% in 2008, 63.8% in 2009–2010, 60% in 2010–2011, and 57.7%
in 2011–2012.
According to the survey, improved resale value of residential housing had more influence in the
cost-value ratio than construction costs, the first time in four years. Fitch expects overall returns
to improve modestly as gains in home prices will likely exceed higher construction costs in the
near to intermediate term.
Cost versus Value
(Percentage Recouped at Resale)
(%)
90
80
70
60
50
2003
2004
2005
2006
2007
2008
'09–'10
'10–'11
'11–'12
2013
2014
Source: Remodeling Magazine.
Cost versus Value
(Percentage Recouped at Resale)
Replacement
(%)
Remodeling
120
100
80
60
40
2003
2004
2005
2006
2007
2008
'09–'10
'10–'11
'11–'12
2013
2014
Source: Remodeling Magazine.
Small Jobs and Replacement Projects Have the Best Returns
According to the 2014 Cost Versus Value survey, eight of the top 10 performing projects cost
less than $15,000. Historically, exterior replacement projects have always achieved a higher
overall cost-value ratio compared with discretionary projects and that was again the case in
2014. The survey indicated that the average cost-value ratio of all 14 replacement projects
included in the report was 73.7% during 2014, an almost 9 percentage points higher than that
of the 21 remodeling projects, which together averaged 65.1%. Replacement projects have
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typically performed better in resale value than other types of remodeling projects, partly
because they are among the least expensive (covered in the survey), and partly because they
are often nondiscretionary improvements that contribute to curb appeal, which is a strong
subjective factor among homebuyers.
Spending on Big Ticket and Upscale Renovations Continues to Lag
According to the Cost Versus Value Report, the cost-value ratio for all projects improved 10%
on average, with midrange priced projects advancing 10.6% versus the 8.8% increase for
upscale improvements. Fitch believes the lack of available credit to finance big-ticket
renovations, as well as lower returns on upscale projects, will continue to restrain spending on
big-ticket renovations. As noted, replacement projects continue to perform better in resale than
other types of remodeling projects. An emphasis on essentials over extras likely will continue to
influence homeowner decisions in the intermediate term.
According to the NAHB’s RMI, the component of the index measuring remodelers’ views of
current market conditions for major additions and alterations (jobs valued at $25,000 or more)
continues to lag behind the indices for minor additions and alterations, and maintenance and
repair. During second-quarter 2014, the current market conditions index for major additions and
alterations improved to 54 from 49 during the first quarter. This index has been above 50 five
times since the beginning of 2006. (A number higher than 50 indicates the majority of
remodelers view market conditions as improving.) By comparison, the current market
conditions index for minor additions and alterations improved to 56 during second-quarter 2014
from 53 during the first quarter, and has been above 50 since fourth-quarter 2011. The index
for maintenance and repair was 58 during second-quarter 2014 compared to 59 during the
first quarter and has been above 50 since fourth-quarter 2009.
However, it is important to note that for owner-occupied properties, the index for major
additions and alterations have been above 50 since second-quarter 2012 while this index for
rental properties remains below 50. There are indications homeowners, though still cautious,
are somewhat more willing to undertake discretionary projects and purchases. According to
Home Depot, average ticket prices for transactions greater than $900 have increased on a
YOY basis during the past 13 quarters. During the second quarter of fiscal 2014, transactions
for tickets more than $900, which represent approximately 20% of Home Depot’s U.S. sales,
were up 8.4% on a YOY basis. This follows a 2.5% improvement in the first quarter, a
5.5% growth in fourth-quarter 2013, and a 10.3% increase in third-quarter 2013. According to
Home Depot, the drivers behind the increase in big-ticket purchases during the second quarter
were strength in appliances, windows, water heaters and wood and laminate flooring.
Cost Versus Value Report
Project Name
Entry Door Replacement (Steel)
Deck Addition (Wood)
Siding Replacement (Fiber-cement)
Attic Bedroom
Garage Door Replacement (Midrange)
Garage Door Replacement (Upscale)
Minor Kitchen Remodel
Window Replacement (Wood)
Window Replacement (Vinyl)
Siding Replacement (Vinyl)
Top 10 Performing Projects
2014
Job
Cost
Cost ($) Recouped (%)
1,162
96.6
9,539
87.4
13,378
87.0
49,438
84.3
1,534
83.7
2,791
82.9
18,856
82.7
10,926
79.3
9,978
78.7
11,475
78.2
2013
Job
Cost
Cost ($) Recouped (%)
1,137
85.6
9,327
77.3
13,083
79.3
47,919
72.9
1,496
75.7
2,720
75.2
18,527
75.4
10,708
73.3
9,770
71.2
11,192
72.9
Source: Remodeling Magazine, Remodeling Cost Versus Value Report 2014 and 2013.
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Preference for Larger Homes Has Again Become Evident
Recently released U.S. Census Bureau data for 2013 indicated the typical single-family home
size increased 3.7% over 2012. The average home built in the U.S. was 2,598 sf in 2013, up
from 2,505 sf in 2012, 2,480 sf in 2011 and 2,392 sf in 2010. The average home size has now
increased for three consecutive years after declining each year from 2008 to 2010.
Also, residential architects report home sizes are growing, particularly for custom and luxury
homes. The 2014 first-quarter American Institute of Architects Home Design Trends Survey
stated 15% of respondents reported overall home sizes are increasing and 25% indicated more
expensive, upper-end homes are increasing in square footage. The trend is similar for
additions and remodels of existing homes, wherein 25% reported an increase in square
footage. However, for entry-level homes, only 6% of respondents reported an increase in home
sizes.
Greater affordability (largely due to lower interest rates) during the past few years and a shift to
a higher percentage of trade-up buyers are probably influencing the recent increase in square
footage numbers. However, the sharp increase in rates and rising home prices are moderating
affordability, which could somewhat dampen preference for larger homes. During the second
quarter of 2014, the average size of single-family homes completed averaged 2,652 sf, a 0.3%
increase compared with the 2,643 average sf of single-family homes completed during the
second quarter of 2013.
Larger homes typically will cost more to repair and remodel than smaller homes. Home
improvement projects, such as repainting, replacing the roof, or changing the floor, cost more
because of increased square footage. Additionally, homeowners are likely to spend more to
remodel or repair additional rooms in a larger home.
EPA Lead Renovation, Repair, and Painting Rule
The EPA issued a Lead Renovation, Repair, and Painting (RRP) rule in April 2010. The rule
addresses remodeling and renovation projects disturbing more than 6 sf of potentially
contaminated painted surfaces for all residential and multifamily structures built prior to 1978.
The RRP rule requires firms and individuals involved in interior and exterior renovation repair
and painting to be certified and follow specific lead-safe work practices to minimize exposure to
lead-based paint dust. The rule affects paid renovators, including renovation contractors,
painters and other specialty trades.
The EPA estimates the new rule will add approximately $8 to $167 to the cost of the average
interior remodeling job. However, certain contractor estimates indicate the extra time and effort
required under the new mandate could add 5% to 30% in fees on small renovations. Fitch
expects the added cost likely will be passed on to the consumer as contractors comply with this
requirement.
Foreclosures
2008–2010
According to RealtyTrac, Inc. (RealtyTrac), more than 2.3 million American homeowners faced
foreclosure proceedings in 2008, up 81% from 2007. Nationwide, more than 860,000 properties
actually were repossessed by lenders. There were approximately 95,000 short sales in 2008.
The four states with the highest foreclosure rates in 2008 were Nevada, Florida, Arizona and
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California. More than 1.1 million properties in those four states received foreclosure notices,
almost half the national total. RealtyTrac indicated 2.82 million U.S. properties received at least
one foreclosure filing in 2009, a 21% increase over 2008. There were an additional 260,000
short sales in 2009.
In 2010, 3,825,637 foreclosure filings were reported on a record 2,871,891 properties, an
increase of almost 2% from 2009. There were 365,000 short sales in 2010.
2011–2013
RealtyTrac stated foreclosure filings in 2011 totaled 1,887,777, a 34% decrease compared with
2010. A total of 1,836,634 foreclosure filings were reported in 2012, down 2.7% from 2011. In
2013, foreclosure filings were reported on 1,361,795 properties, a 26% decrease from 2012
and down 52.6% from the peak in 2010.
2014
Foreclosure filings were reported on 613,874 properties in first-half 2014, off 23% from first-half
2013. One in every 214 U.S. housing units had a foreclosure filing in the first six months of the
year.
There were 107,194 U.S. properties with foreclosure filings in June 2014, a 2% decline from
th
May and off 16% from a year earlier. June was the 45 consecutive month in which foreclosure
activity declined from a year earlier, helping to drop the first-half foreclosure activity to the
lowest level since 2006.
Effect on Remodeling Spending
Homeowners facing foreclosure (or are at the risk of facing foreclosure) are unlikely to
undertake home renovations, including maintenance-type projects. However, home
foreclosures also could spur remodeling spending as owner-occupant buyers update these
homes and/or investors remodel these homes to either sell or rent. Over the past couple of
years, an unusually large percentage of existing home sales have been foreclosures and short
sales, and a sizeable portion of the buyers appear to be investors.
According to the JCHS, spending on distressed properties reached almost $10 billion in 2011.
The JCHS research estimates institutional sellers made improvements to about a third of their
foreclosed properties for sale, totaling about $1.7 billion or an average of $6,500 per unit. The
research also indicated about 60% of homebuyers who purchased a foreclosed home made
improvements to the property, averaging about $11,000 per home for a total of $4.2 billion. By
comparison, investors spent roughly $15,600 per home ($3.9 billion total) after purchasing a
distressed property.
Underwater Mortgages
CoreLogic indicated 5.3 million, or 10.7%, of all residential properties with a mortgage were in
negative equity at the end of the second quarter of 2014. This is down from 7.1 million
properties, or 14.5%, in the second quarter of 2013. An additional 1.3 million borrowers had
less than 5% equity, referred to as near-negative equity, in the second quarter of 2014.
Homeowners are in negative equity when they owe more on their mortgage than their home is
worth. Additionally, there are 10 million residential properties with a mortgage (19% of the total)
that have less than 20% equity.
During the first half of 2014, 1.26 million residential properties returned to a state of positive
equity due to home price appreciation. During 2013, rising home prices led to improvements in
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home equity, with 4 million residential properties regaining equity last year. CoreLogic indicated
that if home prices rose another 5%, an additional 1 million properties would regain equity.
According to the second-quarter Zillow Negative Equity Report, approximately 17% of all
homeowners with a mortgage — or 8.7 million — were underwater in second-quarter 2014.
This figure is down from the 12.2 million homeowners (23.8%) reported during second-quarter
2013 who had negative equity. For those homeowners with 20% or less equity in their homes,
the percentage is about 34.8% during second-quarter 2014.
Homeowners with negative equity typically cannot move unless they default on their mortgages
or are able to arrange a short sale. Additionally, homeowners with less than 20% of equity may
also find it difficult to afford the down payment on another home as well as cover all the
associated costs, including closing costs and real estate agent fees.
This situation affects remodeling activity by reducing home sales and the improvements
triggered by the turnover. Additionally, similar to homeowners facing foreclosure, homeowners
with underwater mortgages are unlikely to undertake remodeling projects, particularly large
renovations, as they may not recover these investments once the property is sold.
According to data compiled by the JCHS, owners with less than 20% equity on their homes
spent roughly 22% less, on average, on home improvements and 30% less on discretionary
projects compared with owners with at least 20% equity.
Average Annual Per-Owner Improvement Spending in 2011
Discretionary
($)
4,000
Replacement
Other
3,000
2,000
1,000
0
0% or Less
1–19%
20–49%
50–99%
100%
Owners Providing
Mortgage Information
Note: Percentages represent equity as a share of home value.
Source: Joint Center for Housing Studies of Harvard University. The U.S. Housing Stock: Ready for Renewal.
Demographic Trends
Current and emerging demographic trends point to steady and often generally increasing longterm demand within the home improvement industry. While the considerable number of baby
boomers and Generation X consumers continue to fuel spending in residential improvements,
the growing importance of women, minorities and immigrants also should boost demand for
home improvement activities going forward.
Baby Boomers
The baby boomers represent a significant customer base for the home improvement industry.
With more than 80 million people, this generation accounts for about one-quarter of the U.S.
population. With a higher homeownership rate and disposable income than other age groups,
baby boomers fueled home improvement spending the past decade, accounting for a greater
than 50% share of total improvement spending. According to a study published by the JCHS,
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baby boomers accounted for about 49% of total home improvement spending in 2011. Over the
next 15 years, the entire baby boomer generation will turn 65 and go into their retirement years.
This likely would lead to changes in housing needs that may trigger significant housing turnover
or meaningful home renovations in the decades ahead.
Generation X
Although smaller in number than the baby boomers, Generation Xers (those born roughly
between 1965 and 1984) are a major emerging segment in homeownership as well as the
home remodeling market. According to the JCHS, Gen Xers, who began to be homeowners in
1995, accounted for only 5% of improvement spending by owners that year. This generation’s
share of improvement expenditures grew to 27% in 2005 and 32.2% in 2011. In 2011,
Generation Xers spent $56.8 billion on home improvements, or an average expenditure of
$8,690 per homeowner. This is just slightly below the $8,800 average spent by the baby
boomers. Within the Gen X cohort, those born between 1965 and 1974 had the highest
average expenditures at roughly $9,375 during 2011. This age group, now in their 30s and 40s,
likely will increase spending on home remodeling as they enter their peak earning years.
However, it is important to note for a certain age group within this cohort, homeownership rates
declined significantly during the past six years. According to Census data, homeownership
rates for households headed by an individual age 35–44 fell from about 70.1% during the first
quarter of 2005 to 60.2% during the second quarter of 2014, a 9.9 point decline. By comparison,
the national homeownership rate for all age groups fell 4.4 points from 69.1% to 64.7% during
the period. The significant decline in homeownership rates for this age group (35–44) could
affect overall home improvement spending for the Gen X cohort going forward.
Role of Women in Home Improvement
Women are making up a growing share as the heads of U.S. households. This segment has a
significant and growing role in the housing market, with homeownership rates for households
headed by females hitting 46.7% in 2013, up from 44% in 1990. As such, the remodeling
industry started to pay attention to the buying power of the female consumer. While women
have always played a role in home improvement choices, they are now undertaking remodeling
projects and doing it themselves. Women DIYers have become an important segment in the
home improvement marketplace. By 2003, both Lowe’s and Home Depot reported 50% of their
customer base was female. Websites such as BeJane.com and the “Do-It-Herself Workshops”
offered by Home Depot were established to address the needs of women DIYers.
Growing Importance of Minorities
Minorities also continue to represent a larger portion of U.S. household growth. Based on
household projections by the JCHS, immigrant and minority households are expected to
account for roughly 72% of net growth between 2013 and 2020. Although homeownership
generally has increased among minorities the past decade, there is still a disparity between
ownership levels for different groups. The homeownership rate for non-Hispanic whites during
second-quarter 2014 was 72.9%. By comparison, 43.5% of African-Americans were
homeowners, while the rate for Hispanic households was 45.8%. The homeownership rate for
Native Americans, Asians, and Pacific Islanders was 54.7%. Based on data compiled by the
JCHS, minority homeowners have increased their share of remodeling expenditures. Minority
homeowners accounted for about $27.7 billion of improvement expenditures, or 15.7% of total
expenditures, in 2011. This compares to roughly $30 billion, or 16.1% of total expenditures, in
2009 and $13.5 billion, or 12.4% of total expenditures, in 1995.
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Foreign-Born Households
The increasing number of immigrant homeowners also provides a key source of demand for
home improvement spending. Based on Census data, foreign-born households are projected to
account for about 35.7% of total household growth between 2010 and 2020, down from the
39.2% growth seen during 2000–2010. Homeownership rates are projected to increase from
49.8% in 2000 to 52.4% in 2010 and 55.7% in 2020.
According to the JCHS, foreign-born homeowners spent about $23.4 billion on improvements
to their homes in 2007, a figure that has been growing almost 13% per year since 2000 and
exceeds the 7% growth among the domestic-born population. As a result, immigrant owners
accounted for more than 10% of home improvement expenditures in 2007, up from 8.5% in
2001. With the recession, net immigration slowed to about 860,000 per year between 2007 and
2009, down from the 1 million annually during 2000 2007. The JCHS indicated that, during
2007 2011, per-household spending on improvements fell more among foreign-born than
native-born homeowners, resulting in the foreign-born share of remodeling spending
decreasing below 10% during 2009 to $18.7 billion. Total spending for this group fell further in
2011 to $16.1 billion and accounted for about 9.1% of the total.
Do-It-Yourself
DIY home improvement projects gained popularity as more homeowners became exposed to
makeover and home improvement television shows. Additionally, the increasing availability of
affordable and easy-to-use tools and the abundance of remodeling information on the Internet
have encouraged homeowners to undertake DIY projects. According to the JCHS,
approximately 24% of home improvement expenditures during 2003 were DIY projects.
Fitch previously assumed the DIY market would be more resilient than the professional market,
particularly during economic recessions. This was not the case during the recent housing
downturn and recession. While total home improvement expenditures declined from peak
levels in 2007, the DIY segment has shown a greater contraction compared to the professional
market. Based on the data compiled by the JCHS, DIY spending fell to $31 billion or 17.6% of
the total during 2011 from $49 billion (21.4%) during 2007. This represents a 36.7% decline
from 2007 to 2011. By contrast, overall spending fell 23.1% during this period and the share of
professional home improvement only contracted 18.8%.
The larger decline in improvement spending among DIYers reflects, in part, the economic
conditions of younger homeowners, which are traditionally the most active group in the DIY
market. From the second quarter of 2008 to the second quarter of 2013, the homeownership
rates for households under the age of 35 fell from 43.3% to 35.9%, a 7.4-point decline.
Similarly, for the 35–44 age group, the homeownership rates fell 9.9 points to 60.2%. By
comparison, the overall homeownership rate during this period dropped 4.4 points.
Do-It-for-Me
Baby boomers (often less physically able to do projects), time-pressed schedules, greater
affluence, and growing desire for high-end projects requiring highly skilled labor have shifted
some consumers from DIY to do-it-for-me (DIFM). With the first of the baby boomers having
turned 65 in 2011, this generation is expected to be a significant influence in the DIFM market.
This age group generally has the wherewithal to pay someone else to do the work. As such,
major retailers, including the “big box” centers, have rapidly expanded their installation services
to capitalize on this trend. According to the JCHS, DIFM accounted for 82% of total home
improvement expenditures during 2011, totaling $145.3 billion.
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Big Box Home Improvement Stores
The home improvement industry is fragmented, with various retail channels including home
centers, lumberyards, hardware stores, and garden stores/nurseries. Home Depot and Lowe’s,
the two largest chains, are building very few new stores in the U.S., and are generating virtually
all of their growth from existing stores. Home Depot is now one of the largest U.S. retailers and
the world’s largest home improvement retailer with 2013 sales of $78.8 billion and 2,263 stores.
Lowe’s is the world’s second-largest home improvement retailer with 2013 sales of $53.4 billion
and 1,832 stores.
The prototype big box store has about 110,000 sf of retail space plus a 20,000- to 30,000-sf
garden center, and stocks 35,000–45,000 products. These stores offer lumber, paint, hardware
tools, lawn and garden equipment, and appliances. Furthermore, the large home centers offer
a wide selection of services, such as in-store clinics and workshops to help customers do
projects themselves, truck and tool rental and installation services.
Sales at home improvement retailers are anticipated to grow low to mid-single-digits in 2014,
driven by the housing recovery.
Home Improvement Spending Surveys
Several surveys regarding plans for remodeling projects in 2014 suggest slightly more
homeowners expect to do home improvement projects this year compared with 2013 levels.
However, it also appears large-ticket projects will continue to lag the growth in the overall home
improvement market as most homeowners expect to finance remodeling projects with cash and
credit card payments.
American Express Spending and Saving Tracker
In March 2014, American Express released the results of a survey completed online among a
random sample of consumers 18 and up. A total of 1,503 interviews were completed.
According to the survey, 73% of homeowners have some form of home improvement project
planned this year. This percentage is up from the 2013, 2012 and 2011 surveys, wherein 72%,
70% and 64%, respectively, indicated they have a home improvement project on the docket.
On average, homeowners expect to spend about $4,000 per project, flat compared with 2013
and moderately above the $3,500 expected to be spent during 2012. Among those surveyed,
72% of these homeowners will undertake DIY projects, up from 71% last year and 66% in 2010.
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About 15% expect to hire a contractor to do the renovation, down from the 17% response last
year and 22% in 2010.
Among the homeowners surveyed, about a third indicated their primary motivation for home
remodeling was to make changes to their homes to better reflect their personal style and
preference. About 28% of respondents said their primary reason for renovation was to increase
the value of their home, while 9% are doing renovations to prepare their homes for sale.
Houzz & Home Survey
In March 2014, Houzz, Inc., a leading online platform for home remodeling and design,
conducted a survey with more than 135,000 respondents in the U.S. The following are
highlights of the 2014 Houzz and Home survey:
74% of homeowners say the housing market in their area has improved in the past year.
Homeowners who reported an improved housing market are more likely to be planning a
remodel (42%) than they are to have immediate plans to cash in on improved markets.
About 17% are planning to sell their homes and 13% plan to buy a home in the next two
years.
Bathrooms and kitchens remain the most popular projects, with 26% of the respondents
planning a bathroom remodel and 22% planning a kitchen remodel or addition in the next
two years. Kitchen renovations continue to receive the higher share of dollars overall with
U.S. homeowners spending an average of $26,172 to remodel this space. About 76% of
U.S. homeowners did not add square footage to their existing home in their last
remodeling project.
Home remodeling projects were funded predominantly with cash, with 80% of the
homeowners surveyed saying they paid for their last remodeling project out of pocket.
Only 19% of the respondents said that funding the project was a challenge this year.
According to the survey, 78% of the respondents indicated improving the look and feel of
the space was the primary motivation for remodeling. Furthermore, about 54% are
remodeling to make the space more functional, while 52% are remodeling to increase the
value of their homes.
Industry Outlook
2014 and 2015
Home improvement spending appears to be growing at a steady pace despite irregular
economic growth in 2014. Improving housing turnover and gains in home prices last year and
so far this year are leading to increased optimism and spending for home remodeling.
Financing costs, although increasing, remain favorable. However, credit availability remains
relatively tight for many households. As a result, Fitch believes larger ticket projects will
continue to lag the overall improvement in home remodeling spending.
U.S. Economy
Real GDP expanded by an annual rate of 4.6% in second-quarter 2014 based on the third
estimate by the Bureau of Economic Analysis. In the first quarter, the real GDP decline was
revised to 2.1%, from the previous estimate of a 2.9% decline. The increase in real GDP in the
second quarter reflected positive contributions from personal consumption expenditures,
private inventory investment, exports, nonresidential fixed investment, state and local
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government spending and residential fixed investment. Imports, which are a subtraction in the
calculation of GDP, increased. Fitch forecasts GDP growth of 2.2% in 2014 and 3.1% in 2015.
Housing Outlook
2014 Expectations
Comparisons were challenging through first-half of 2014, and so far this year most housing
metrics seem to have defied expectations and fallen somewhat from a year ago. The severe
winter throughout much of North America restrained some housing activity. Also, there was an
absence of underlying consumer momentum this spring, perhaps due to buyer sensitivity to
home prices and finance rates and the slowing of job growth at year end. But demographics,
attractive affordability/housing valuations, and a slow, steady easing in credit standards should
sustain and ultimately accelerate the upturn.
To reflect the subpar spring selling season, as well as the more guarded expectation for the
summer, Fitch tapered its macro housing forecast. Single-family starts are now projected to
improve 9.5% to 677,000 (down from Fitch’s previous forecast of 15%) and multifamily volume
should grow almost 12% to 343,000. Total 2014 starts should slightly exceed 1 million. New
home sales are forecast to advance about 8% to 465,000 (down from Fitch’s prior forecast of
500,000), while existing home sales volume is expected to decline 6% to 4.785 million (down
from Fitch’s earlier estimate of 5.1 million), largely due to fewer distressed homes for sale.
New home price inflation should moderate in 2014, at least partially because of higher interest
rates. Average and median new home prices should rise about 3.5% in 2014.
2015 Expectations
Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily
growing economy throughout the year. The unemployment rate should continue to move lower
(averaging 5.8% in 2015). Credit standards should steadily, moderately ease throughout next
year. Demographics should be more of a positive catalyst. More of those younger adults who
have been living at home should find jobs and these 25- to 35-year-olds should provide some
incremental elevation to the rental and starter home markets. Single-family starts are forecast
to rise 21% to 819,000 as multifamily volume expands about 6.7% to 366,000. Total starts
would be approaching 1.2 million. New home sales are projected to increase 20.4% to 560,000.
Existing home volume is expected to approximate 5.025 million, up 5%.
New home price inflation should further taper off with higher interest rates and the mix of sales
shifting more to first time homebuyer product. Average and median home prices should
increase 2.5%–3%.
Challenges remain including the potential for higher interest rates and restrictive credit
qualification standards. Fitch believes the housing recovery likely will occur in fits and starts.
Home Improvement Spending
Fitch estimates the home improvement industry had a moderate recovery during the past four
years following declines during 2007–2009. Remodeling spending is likely to continue to pick
up in 2014 and 2015 as homeowners who deferred maintenance as well as improvements
during the recent recession revisit these projects. Most investments in home improvements
over the past few years were focused on necessities. Now there are indications homeowners,
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although still cautious, are somewhat more willing to undertake discretionary projects and
purchases.
Fitch projects home improvement spending will increase 6% in 2014 following an estimated 5%
growth both in 2013 and 2012. The continued improvement in the housing market, as well as
strong home price appreciation seen last year and more moderate but steady price inflation in
2014, is likely to drive higher spending on home renovation projects in 2014 and 2015.
However, growth patterns in the near term are likely to be slightly below what the industry
experienced during 1999–2006 (7% average annual spending growth), due to slower growth in
the U.S. economy and only moderately improved housing market conditions. Fitch expects
home improvement spending will increase 6% in 2015.
However, there are still challenges that could derail a sustained rebound in remodeling
spending. Unemployment levels remain high, consumer credit standards continue to be
relatively tight, and consumer confidence is still subpar compared to historical patterns.
Additionally, monthly housing activity has been quite volatile during the past year, which could
affect consumer sentiment towards home improvement spending.
HIRI projects the home improvement products market will increase 4.9% to $303 billion in 2014
following 4.2% estimated growth in 2013. (HIRI recently revised its 2014 growth projection
downward from 6.5% earlier in the year as the home building and existing home sales continue
to underperform relative to its expectations.) HIRI expects the acceleration of housing market
activity and real income growth projected for 2015 will boost home improvement products sales
5.8% next year.
The JCHS’ Leading Indicator for Remodeling Activity (LIRA) suggests homeowners spent
$133.1 billion on home improvements in 2013, a 5.6% increase over 2012. (The LIRA is
designed to estimate national homeowner spending on improvements, but excludes
maintenance and repair spending.) The latest LIRA report suggests the growth in home
improvement activity is expected to peak during second-half 2014, and then begin to ease
heading into next year. The report said annual homeowner improvement spending is forecast
to grow 9.9% in 2014 to roughly $146.2 billion.
Leading Indicator for Remodeling Activity
Expenditures in Billions
(4-Quarter Moving Total, %)
Annual Rate of Change
(4-Quarter Total Homeownership Expenditures, $ Bil.)
30
160
20
140
10
120
0
100
(10)
80
(20)
60
P – Projection.
Source: Joint Center for Housing Studies of Harvard University.
Long-Term Outlook
In the intermediate and long term, Fitch expects the home improvement market will remain
relatively resilient. High homeownership rates, favorable demographic trends, and the aging of
the U.S. housing stock should provide long-term support for the industry. Home improvement
spending will continue to be influenced to a major degree by new and existing home turnover,
October 10, 2014
40
Corporates
although on a lagged basis and with downturns in the remodeling cycle less pronounced than
the declines in the housing cycle. Fitch estimates that over the intermediate to long-term, home
improvement spending should improve 6%–7% on an annual basis.
The JCHS estimates home improvement spending will increase 3.5% per year compounded in
2010–2015 after adjusting for inflation. The JCHS indicated less than one-third of the increase
comes from the 4.5 million additional homeowners expected in this period. The remaining
two-thirds reflect the increase in per-household spending. According to the JCHS, spending
levels per homeowner are expected to rise because of both an increase in household income
and a change in the mix of households. Over the next five years, growth in the number of
households moving into the 55–64 and 65-plus age ranges — when homeowners typically
prepare their homes for retirement years by making aging-in-place retrofits — is expected to be
particularly strong.
HIRI projects moderate growth for the industry. HIRI projects spending will advance 4.8% in
2016 and have an average growth rate of 3.8% during 2017–2019.
Demographic Trends
Generation Xers, who came of age amid the popularity of home improvement television shows,
are a growing source of demand for home remodeling, particularly in the DIY segment.
According to the JCHS, the average remodeling spending per household by this generation is
almost equal to that of the baby boomers during 2011. Rising homeownership rates as well as
growing disposable income should support increased remodeling spending by this age group.
The baby boom generation also is expected to continue to be an active participant in the home
improvement market, as more than 70% of baby boomers own homes, and because they have
more disposable income than any other age group. To the extent baby boomers stay in their
current homes (and/or purchase second homes), new design features and amenities are likely
to be incorporated into these homes to accommodate the changing needs of this generation.
The baby boom generation is expected to have the greatest influence in the DIFM category of
the home improvement market.
According to a study by the JCHS (Housing Turnover by Older Owners: Implications for Home
Improvement Spending as Baby Boomers Age into Retirement) published March 2011, as baby
boomers relocate or downsize in retirement, a very large amount of housing stock is expected
to hit the market. The JCHS research indicated during 1997–2007, roughly 30% of home
sellers were age 55 or older. The research also concluded older sellers generally have lived in
their homes for many years and sell relatively older homes to younger buyers. According to the
JCHS, housing turnover generates remodeling activities, and the sale of older homes to
younger households typically results in larger home improvement spending. As mentioned
earlier, Generation Xers already spend more on average for home improvements than any
other age group. Over the next decade, Generation Y (“Echo Boomers”) will start to reach
adulthood and become homeowners. Another important driver of homeownership over the next
decade will be the movement of recent immigrants into homeownership. For most immigrants
there is a fairly substantial time lag — roughly five to 15 years — before they progress to
homeownership. Immigrants typically pursue citizenship first and need time to move up the
economic ladder. According to the JCHS, foreign-born households spent about $16.1 billion on
improvements to their homes in 2011, accounting for about 9.1% of the overall remodeling
spending. The increasing importance of immigrants and Echo Boomers should boost demand
for entry-level homes and, consequently, home remodeling spending.
October 10, 2014
41
Corporates
Fitch Economic and Construction Forecasts
% Change
2012–
2013–
2013
2014
2009
2010
2011
2012
2013
2014E
2015E
2011–
2012
14,418.7
14,418.7
14,964.4
14,783.8
15,517.9
15,020.6
16,163.2
15,369.2
16,768.1
15,710.3
17,455.0
16,055.9
18,365.0
16,553.7
4.2
2.3
3.7
2.2
4.1
2.2
5.2
3.1
214.5
218.1
224.9
229.6
233.0
237.7
241.9
2.1
1.5
1.8
2.0
10,942.5
11,055.1
11,331.2 11,676.2.6
11,650.8
11,850.0
12,135.0
3.0
(0.2)
1.7
2.4
Construction Expenditures ($ Bil.)
Private Residential
Private Nonresidential
Public
Total
% Gross Domestic Product
245.9
344.1
314.9
904.9
6.28
238.8
263.3
304.0
806.0
5.39
244.1
257.8
286.4
788.3
5.08
280.6
301.4
279.3
861.3
5.33
336.2
304.9
269.6
910.7
5.43
376.5
329.3
272.3
978.1
5.60
429.6
349.1
280.5
1,059.2
5.77
15.0
16.9
(2.5)
9.3
19.8
1.2
(3.5)
5.7
12.0
8.0
1.0
7.4
14.1
6.0
3.0
8.3
Housing (Mil. Units)
Starts
+ Beginning Under Construction
- Completions
= Ending Under Construction
0.554
0.781
0.794
0.541
0.587
0.495
0.652
0.430
0.609
0.445
0.585
0.469
0.781
0.469
0.649
0.601
0.925
0.601
0.764
0.762
1.020
0.762
0.879
0.903
1.185
0.903
0.993
1.095
28.2
5.4
10.9
28.1
18.4
28.1
17.7
26.8
10.3
26.8
15.1
18.5
16.2
18.5
13.0
21.3
Single-Family
Starts
Avg. Square Feet
Total Square Feet (Bil.)
0.445
2,367
1,053
0.471
2,382
1,122
0.431
2,504
1,079
0.535
2,521
1,349
0.618
2,669
1,649
0.677
2,735
1,852
0.819
2,776
2,274
24.1
0.7
25.0
15.5
5.9
22.2
9.5
2.5
12.3
21.0
1.5
22.8
Multifamily
Starts
Avg. Square Feet
Total Square Feet (Bil.)
0.109
1,167
127
0.116
1,179
137
0.178
1,133
202
0.246
1,126
277
0.307
1,176
361
0.343
1,195
410
0.366
1,213
444
38.2
(0.6)
37.1
24.8
4.4
30.3
11.7
1.6
13.6
6.7
1.5
8.3
Grand Total Square Feet (Bil.)
1,181
1,259
1,281
1,626
2,010
2,262
2,718
26.9
23.6
12.5
20.2
New Home Sales (000)
Existing Home Sales (000)
375
4,340
323
4,190
306
4,260
368
4,660
430
5,090
465
4,785
560
5,025
20.3
9.4
16.8
9.2
8.1
(6.0)
20.4
5.0
Gross Domestic Product ($ Bil.)
Real Gross Domestic Product ($ Bil., 2009)
Consumer Price Index (CPI-U)
(1982–84=100)
Real Disposable Personal Income
($ Bil., 2009)
Manufactured Housing Ship. (000)
50
50
52
55
60
65
71
5.8
9.1
8.3
Home Improvement Products Market ($ Bil.)
253.4
264.8
278.0
289.7
307.1
325.5
5.0
4.2
6.0
E Estimated.
Sources: U.S. Bureau of Economic Analysis; U.S. Department of Labor, Bureau of Labor Statistics; U.S. Bureau of the Census; National Association of Realtors;
Fitch estimates.
October 10, 2014
2014–
2015
9.2
6.0
42
Corporates
Company Overviews
The ADT Corporation (Analyst: Robert G. Rulla)
The ADT Corporation (NYSE: ADT) is a leading provider of electronic security, interactive
home and business automation and related monitoring services in the U.S. and Canada. In
September 2012, ADT was spun off from Tyco International, Ltd. (Tyco) and became an
independent public company.
Products and End Markets
ADT’s electronic security and home/business automation offerings involve the installation and
monitoring of residential and small business security and premises automation systems designed to
detect intrusion, control access and react to movement, smoke, carbon monoxide, flooding,
temperature and other environmental conditions and hazards, as well as address personal
emergencies. Through the introduction of its ADT Pulse offering, the company has pioneered
interactive technologies that allow its customers to remotely monitor and manage their homes and
small business environments through their electronic security systems.
The company serves more than six million residential and small business customers throughout the
U.S. and Canada. ADT’s residential customers are typically owners of single-family homes, while its
small business customers include, among others, retail businesses, small-scale commercial facilities
and offices of professional service providers and similar businesses.
Evolving Financial Strategy
The company has revised its financial strategy twice since its spinoff from Tyco. Following its
spinoff, management was committed to a strong investment grade rating and put in place a
capital structure that reflected this profile.
In November 2012, ADT initiated a $2 billion share repurchase program over a three-year
period that will be funded by debt and FCF. As part of this strategy, the company increased its
leverage target to 2x and reiterated its commitment to an investment grade rating.
In July 2013, the company once again changed its financial strategy and increased its leverage
target to 3x. ADT expects to use proceeds from the incremental leverage to invest in growing
its core business, increase operating efficiency, and pursue accretive acquisitions to
complement its organic growth, as well as return excess cash to shareholders in the form of
dividends and share buybacks.
In November 2013, the board increased ADT’s $2 billion share repurchase program by an
additional $1 billion, expiring on Nov. 27, 2015. ADT repurchased $1.24 billion of stock during
fiscal 2013 (ending Sept. 27, 2013) and $1.38 billion during the nine months ended
June 27, 2014. As of the end of the June quarter, ADT had $380.8 million remaining under the
authorization. In November 2013, the board also approved a 60% increase in the company’s
quarterly dividend to $0.20 per share from $0.125 per share starting in January 2014.
These shifts in strategy create some uncertainty regarding the stability of management’s
financial policies beyond the near term.
Liquidity
ADT has a solid liquidity position with cash of $250 million at June 27, 2014, and no borrowings
under its $750 million revolving credit facility that matures in June 2017. Subsequent to the end
of the June quarter, the company used $375 million of revolver borrowings, together with cash
October 10, 2014
43
Corporates
on hand, to fund the acquisition of Protectron for $520 million. Fitch expects the company will
maintain liquidity of approximately $400 million–$600 million, consisting of cash and availability
under its revolver. ADT does not have any debt maturities until 2017, when $750 million of
senior notes mature.
Leadership Position
ADT has a strong competitive position as the largest residential security provider in the U.S.
ADT currently has over six million customers and a roughly 25% market share based on
company estimates.
Fitch believes that ADT’s competitive position will remain strong in the near to intermediate
term. However, ADT faces competition from nontraditional security service providers. Several
cable and telecom companies have introduced interactive security services that compete with
ADT. While the security service customer base of these companies is substantially smaller
than ADT at the current time, this emerging trend could provide significant competition for ADT.
Resilient Business Model
ADT’s subscriber-based business requires significant upfront costs to generate new customers.
Capex, including dealer-generated accounts and bulk purchases and subscriber systems,
totaled $1.22 billion for the LTM period ending June 27, 2014. Total capex was $1.20 billion,
$1.09 billion and $902 million in fiscal years 2013, 2012 and 2011, respectively. Capex for the
LTM period represent approximately 36.3% of LTM revenues. Fitch expects capex will
approximate 35%–40% of annual revenues in the next few years. Fitch estimates that new
customers yield an average cash payback of three years.
Approximately 92% of ADT’s annual sales are recurring in nature, resulting in steady income
and cash flow. ADT generated $213 million of FCF (6.3% FCF margin) (Free Cash Flow: Cash
flow from operations less capital expenditures and dividends, including special items) for the
LTM period ending June 27, 2014, compared with $348 million (10.5%), $406 million (12.6%)
and $537 million (17.3%) of FCF during fiscal years 2013, 2012 and 2011, respectively. FCF
and FCF margin have been diminishing during the past few years as the company started
paying dividends in fiscal 2013 ($112 million). In November 2013, ADT’s board also approved a
60% increase in the company’s quarterly dividend to $0.20 per share from $0.125 per share
starting in January 2014. Dividends for the LTM period ending June 27, 2014, were
$123 million. Fitch expects FCF margins of 3.5%–5% in the near to intermediate term.
October 10, 2014
44
Corporates
Financial Summary — The ADT Corporation
($ Mil., Fiscal Years)
Profitability
Operating EBITDA
Operating EBITDA Margin (%)
FFO Return on Adjusted Capital (%)
FCF Margin (%)
Coverages (x)
FFO Interest Coverage
Operating EBITDA/Gross Interest Expense
FFO Fixed-Charge Coverage
FCF Debt Service Coverage
Cash Flow from Operations/Capital Expenditures
Leverage (x)
Long-Term Secured Debt/Operating EBITDA
Long-Term Secured Debt/FFO
Total Debt with Equity Credit/Operating EBITDA
FFO Adjusted Leverage
Total Adjusted Debt/Operating EBITDAR
FCF/Total Adjusted Debt (%)
Balance Sheet
Short-Term Debt
Long-Term Senior Secured Debt
Long-Term Senior Unsecured Debt
Long-Term Subordinated Debt
Other Debt
Equity Credit
Total Debt with Equity Credit
Off-Balance Sheet Debta
Total Adjusted Debt with Equity Credit
Cash Flow
Funds from Operations
Change in Working Capital
Cash Flow from Operations
Total Non-Operating/Nonrecurring Cash Flow
Capital Expenditures
Common Dividends
FCF
Net Acquisitions and Divestitures
Net Debt Proceeds
Net Equity Proceeds
Other (Investing and Financing)
Total Change in Cash
Ending Cash and Equivalents Balance
Short-Term Marketable Securities
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
Gross Interest Expense
9/30/11
9/28/12
9/27/13
LTM Ended
6/27/14
1,527
49.1
23.2
17.3
1,612
49.9
20.9
12.6
1,707
51.6
22.5
10.5
1,724
51.1
22.2
6.3
17.7
17.0
12.8
6.9
1.6
17.6
17.3
12.3
5.3
1.4
15.0
14.5
10.8
3.8
1.4
10.3
9.9
8.6
2.2
1.3
—
—
1.0
1.1
1.2
29.7
—
—
1.6
1.7
1.7
14.1
—
—
2.0
2.1
2.2
9.2
—
—
2.7
2.8
2.9
4.2
1
—
1,506
—
—
—
1,507
304
1,811
2
—
2,525
—
—
—
2,527
352
2,879
3
—
3,373
—
—
—
3,376
400
3,776
3
—
4,725
—
—
—
4,728
400
5,128
1,506
(67)
1,439
0
(902)
0
537
0
(6)
0
(550)
(19)
65
—
1,546
(53)
1,493
0
(1,087)
0
406
0
2,488
0
(2,725)
169
234
—
1,653
13
1,666
0
(1,206)
(112)
348
(162)
847
(1,156)
27
(96)
88
—
1,622
(64)
1,558
0
(1,222)
(123)
213
(146)
1,503
(1,535)
(57)
(22)
200
—
3,110
20.0
714
90
3,228
3.8
750
93
3,309
2.5
777
118
3,371
2.9
729
174
a
Includes 8.0x gross rent.
Source: Company reports.
October 10, 2014
45
Corporates
Masco Corporation (Analyst: Robert G. Rulla)
Masco Corporation (NYSE: MAS) is one of the world’s leading manufacturers of home
improvement and building products, which include brand names such as Delta and Hansgrohe,
Kraftmaid and Merillat cabinets, Behr and Kilz paint, and Milgard windows. This broad product
portfolio is supplemented by the company’s installation services operations, which includes the
sale, distribution and installation of building products such as insulation, roofing and gutters,
garage doors and fireplaces. The company’s scale and depth of product offerings will continue to
make it an important supplier to the home improvement and building products markets.
Products and End Markets
Masco is structured on five product and service platforms: cabinets and related products (12.2% of
2013 sales); plumbing products (39.0%); installation and other services (17.1%); decorative
architectural products (23.2%); and other specialty products (8.5%). Masco estimates approximately
72% of its sales go to the repair and remodel channel, while new residential construction accounts
for about 28% of sales. About 81% of its sales are generated from North America, with the
remaining 19% from international operations, primarily Europe.
Spinoff of Installation Business
In September 2014, Masco announced the spinoff of 100% of its installation and other services
businesses into an independent, publicly traded company through a tax-free stock distribution
to Masco shareholders. This business had $1.4 billion of revenues in 2013 and $66 million of
EBITDA. Masco estimates approximately 80% of this segment’s sales go the new home
construction market, while repair and remodel accounts for about 20%.
Fitch estimates that the spinoff of this business will increase leverage by about 25–30 bps. For
the LTM period ending June 30, 2014, debt to EBITDA is estimated to increase from 3.4x to
about 3.7x on a pro forma basis. Similarly, interest coverage is estimated to decline from 4.4x
to 4.1x for the LTM period ending June 30, 2014.
While the spinoff will result in some loss of EBITDA, Masco’s credit profile will benefit from
lower exposure to the more volatile new home construction market. Masco estimates that its
sales to the new home construction market will be reduced from 28% to 17% once the spinoff
is completed.
Capital Allocation
Masco also announced the implementation of a share repurchase program for an aggregate of
50 million shares of its common stock, representing about $1.2 billion at the current share price.
Masco expects to execute the share repurchase program over a multiyear period starting in
fourth-quarter 2014.
In May 2014, Masco’s board approved a 20% increase in its quarterly common stock dividend,
from $0.075 per common share to $0.09 per share. The increased dividend was paid in
July 2014.
The company remains committed to reducing debt by about $300 million–$500 million by 2016.
Management has indicated that it is committed to an investment-grade rating over the long
term and will continue to focus on strengthening the company’s balance sheet.
October 10, 2014
46
Corporates
Liquidity
Fitch is comfortable with the company’s capital allocation strategy, given Masco’s liquidity
position. The company ended second-quarter 2014 with cash of $1.2 billion, $228 million of
short-term bank deposits and about $1.2 billion of availability under its revolving credit facility.
Of the $1.4 billion of cash and short-term bank deposits, $620 million is held in foreign
subsidiaries. Additionally, Masco expects to receive about $200 million from the spinoff of the
Installation business. The company also generates strong FCF, totaling about $419 million for
the LTM period ending June 30, 2014.
During the past housing downturn, Masco was disciplined with its share repurchase program in
order to preserve its liquidity position. Fitch expects the company will pull back on share
repurchases to strengthen its liquidity if macro conditions deteriorate.
October 10, 2014
47
Corporates
Financial Summary — Masco Corporation
($ Mil., Years Ended Dec. 31)
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Cash Flow
Common Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
2010
2011
2012
2013
LTM Ended
6/30/14
771
10.2
10.8
2.9
585
7.8
9.2
(0.3)
719
9.3
112.1
0.7
948
11.6
18.8
5.0
995
11.9
19.0
5.0
2.4
3.1
2.0
1.5
3.4
1.6
2.3
1.4
0.2
1.0
2.0
2.8
1.7
0.7
2.4
3.6
4.0
2.8
2.7
5.1
3.8
4.4
3.0
0.9
5.3
—
—
5.3
7.0
5.7
4.4
—
—
6.9
9.5
7.0
(0.4)
—
—
5.0
7.4
5.4
1.3
—
—
3.6
4.5
4.0
9.9
—
—
3.4
4.3
3.8
10.0
66
—
4,032
—
—
—
4,098
888
4,986
803
—
3,198
—
24
—
4,025
824
4,849
206
—
3,404
—
18
—
3,628
768
4,396
6
—
3,404
—
17
—
3,427
744
4,171
507
—
2,921
—
—
—
3,428
746
4,174
350
115
465
—
(137)
(108)
220
18
124
(45)
(15)
302
1,715
—
155
(2)
153
86
(151)
(107)
(19)
14
(64)
(30)
40
(59)
1,656
—
245
36
281
—
(119)
(107)
55
76
(396)
(8)
(32)
(305)
1,351
—
607
38
645
—
(126)
(107)
412
37
(206)
(35)
(25)
183
1,223
305
653
(6)
647
—
(121)
(107)
419
41
(201)
(38)
62
283
1,195
228
7,592
(2.6)
492
251
7,467
(1.6)
381
254
7,745
3.7
505
254
8,173
5.5
762
235
8,373
6.1
775
227
a
October 10, 2014
48
Corporates
Mohawk Industries, Inc. (Analyst: Robert G. Rulla)
Company Overview
Mohawk Industries, Inc. (NYSE: MHK) is a leading producer of floor covering products for
residential and commercial applications. Mohawk operates in three business segments: Carpet
(40% of 2013 sales); Ceramic (40%); and Laminate and Wood (20%). The company is the
nation’s second-largest carpet and rug manufacturer, behind Shaw Industries, and is one of the
largest manufacturers, marketers and distributors of ceramic tile, natural stone and hardwood
flooring, as well as a leading producer of laminate flooring in the U.S. and Europe.
The company markets its products primarily to the construction industry, with a majority of
sales directed to the residential construction market. Management estimates that roughly 20%
of its worldwide sales are directed to the commercial construction market. Sales in the U.S.
accounted for about 70% of its pro forma 2013 sales.
Growth Strategy
Mohawk completed three major acquisitions during the first half of 2013. These acquisitions
aided the company’s geographic expansion and diversification, broadened its product offerings
and also provided it with a strong profitable position in growing emerging markets.
On Jan. 10, 2013, Mohawk completed its acquisition of Pergo, a leading manufacturer of
laminate flooring in the U.S. and the Nordic countries with sales of $334 million during 2012,
from Pfleiderer AG. The purchase price was $150 million.
On April 3, 2013, the company completed the purchase of Marazzi Group SpA, a global
manufacturer, distributor and marketer of ceramic tile with 2012 sales of EUR858 million. The
acquisition price was approximately $1.5 billion. The Marazzi acquisition made Mohawk the
global leader in ceramic tile.
On May 3, 2013, the company completed the acquisition of Spano Group, a Belgian panel
board manufacturer with sales of EUR183 million during 2012. The value of the acquisition was
roughly $160 million. Spano extended the company’s Laminate and Wood segment’s customer
base into new channels of distribution.
Leadership Position
Management estimates that the company is the world’s largest flooring manufacturer. Mohawk
is the nation’s largest manufacturer of ceramic tiles and the second-largest carpet and rug
manufacturer, as well as a leading producer of laminate flooring in Europe and the U.S. Fitch
believes that this leadership position provides the company with competitive advantages such
as a broad array of product offerings, access to a wider range of distribution channels, and a
strong platform to execute its growth initiatives and geographic expansion.
Credit Metrics
Leverage as measured by debt to EBITDA was 2.2x for the LTM period ending June 28, 2014,
compared with 2.3x during fiscal 2013, 2.0x during fiscal 2012 and 2.5x during fiscal 2011.
EBITDA to interest remains strong at 12.4x compared with 10.7x during fiscal 2013, 8.7x during
fiscal 2012 and 6.0x during fiscal 2011. Fitch’s Positive Outlook for Mohawk incorporates,
among other things, the expectation that leverage will approach 2x by the end of 2014 and will
be sustained at or below this level thereafter.
October 10, 2014
49
Corporates
Mohawk has demonstrated that it has the discipline to reduce leverage levels following a major
acquisition. Following its acquisition of Unilin Holding NV in 2005, leverage increased from 1.2x
at year-end 2004 to 4.3x at the end of 2005. Leverage was reduced to 2.5x at the end of 2006
and to 2.1x at year-end 2007. Fitch expects Mohawk to focus on debt reduction during the next
few years, although the company may use excess FCF for smaller, bolt-on acquisitions.
Liquidity
The company has adequate liquidity with cash of $70 million at June 28, 2014, and roughly
$373 million of availability under its $1 billion CP program backed by the company’s revolving
credit facility that matures in September 2018. The company had $560 million of CP
borrowings, $27.4 million of revolver borrowings and $39.2 million of letter of credit issuances
under the revolver.
Mohawk generated $39.3 million of FCF during the LTM period ending June 28, 2014,
compared with $158.7 million during 2013 and $379.3 million during 2012. The lower FCF for
the LTM period was due to higher capex (including capacity additions and restructuring
initiatives), which totaled $470.2 million, or 6.1% of revenues. By comparison, capex totaled
$366.6 million (5% of revenues) during 2013 and $208.3 million (3.6%) during 2012.
October 10, 2014
50
Corporates
Financial Summary — Mohawk Industries, Inc.
($ Mil., Fiscal Years Ended Dec. 31)
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Off-Balance Sheet Debt
Cash Flow
FFO
Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Other (Inv. and Fin.)
Ending Cash and Securities Balance
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
2010
2011
2012
2013
LTM
6/28/14
631
11.9
13.4
3.1
647
11.5
12.1
0.4
693
12.0
12.4
6.6
986
13.4
11.2
2.2
1,121
14.5
11.9
0.5
4.9
4.6
3.2
0.6
2.0
5.6
6.0
3.4
0.3
1.1
8.0
8.7
4.1
3.4
2.8
8.1
10.7
4.1
1.1
1.4
9.3
12.4
4.6
0.1
1.1
—
—
2.6
3.2
3.4
6.5
—
—
2.5
3.4
3.2
1.1
0.4
0.5
2.0
3.0
2.7
17.5
0.3
0.5
2.3
3.7
2.9
5.0
0.3
0.4
2.2
3.5
2.7
1.2
351
—
1,303
—
—
—
1,654
848
2,502
386
—
1,200
—
—
—
1,587
827
2,414
55
280
999
—
49
—
1,383
781
2,164
127
300
1,737
—
96
—
2,260
932
3,192
1,179
300
908
—
39
—
2,426
931
3,358
538
(218)
320
0
(156)
0
164
(80)
(201)
2
(63)
(177)
354
—
498
(197)
301
0
(276)
0
25
(24)
(78)
4
30
(42)
312
—
555
33
588
0
(208)
0
379
0
(204)
16
(26)
166
478
—
653
(140)
513
13
(367)
0
159
(444)
(146)
47
(40)
(424)
54
—
748
(251)
497
13
(470)
0
39
6
(177)
24
9
(99)
70
—
5,319
(0.5)
334
137
5,642
6.1
349
108
5,788
2.6
412
79
7,349
27.0
672
92
7,747
21.6
788
91
October 10, 2014
51
Corporates
Owens Corning (Analyst: Robert G. Rulla)
Company Overview
Founded in 1938, Owens Corning Corporation (NYSE: OC) is a leading global producer of
residential and commercial building materials, glass fiber reinforcements and engineered
materials for composite systems. OC operates in two general reportable segments:
Composites (34% of 2013 sales) and Building Materials (66%, which includes its Insulation
Systems and Roofing businesses). Fitch estimates that approximately 22% of OC’s 2013 sales
were directed toward the U.S. and Canadian commercial and industrial construction sectors.
Roofing
OC is one of the largest U.S. producers of asphalt roofing shingles and industrial, specialty,
and roofing asphalts. OC sells shingles and roofing accessories primarily through home
centers, lumberyards, retailers, distributors and contractors in the U.S. It also sells other
products internally to manufacture residential roofing products and externally to other roofing
manufacturers. In 2013, U.S. and Canadian residential repair and remodeling revenues
accounted for 74% of sales, while new residential construction and commercial/industrial
represented 10% and 15% of sales, respectively. International sales accounted for 1% of sales.
Insulation
OC is the largest producer of residential, commercial and industrial insulation in North America,
sold under well-recognized brand names and trademarks such as Owens Corning Pink
Fiberglas Insulation. OC sells its insulation products primarily to insulation installers, home
centers, lumberyards, retailers and distributors in the U.S. and Canada. Demand for the
company’s insulating products is driven by U.S. and Canadian new residential construction
(40% of 2013 sales), residential repair and remodel activities (20%), and the commercial and
industrial sector (24%). International operations accounted for 16% of insulation products
revenues for the year.
Composites
OC’s glass fiber materials can be found in more than 40,000 end-use applications, including
sporting goods, computers, telecommunications, boats, aircraft, defense products, automotive,
industrial containers and wind energy. Demand for composites is driven by general global
economic activity and by the increasing replacement of traditional materials such as aluminum,
wood and steel with composites, which offer lighter weight, improved strength and less
corrosion. International sales represent the largest end market, accounting for 60% of this
segment’s 2013 sales. The U.S. and Canadian commercial and industrial sectors represented
27% of sales, while residential repair and remodel and residential construction each made up
10% and 3% of sales, respectively.
Credit Metrics
OC’s leverage remains elevated. Debt to EBITDA was 3.2x for the LTM period ending
June 30, 2014, compared with 2.7x during fiscal 2013 and 3.4x during fiscal 2012. EBITDA to
interest remains strong at 6.4x for the LTM period ending June 30, 2014, compared with 6.7x
during fiscal 2012 and 5.4x during fiscal 2012. Fitch expects these credit metrics to improve by
year-end 2014 as OC benefits from increased housing and commercial construction activity,
and an improved global economy.
October 10, 2014
52
Corporates
Liquidity
The company has solid liquidity with $81 million of cash as of June 30, 2014, and $587 million
available under its $800 million revolver that matures in 2018. The company should have
continued access to its revolver, as Fitch expects OC to continue to have sufficient cushion
under its financial covenants. The company has been moderately active with share
repurchases over the past few years, buying back approximately $63 million of stock during
2013, $113 million during 2012, $138 million during 2011 and $120 million during 2010. For the
first six months of 2014, share repurchases totaled $44 million. Fitch expects the company will
continue with moderate share repurchases, financed primarily from FCF. Share repurchases
likely will be adjusted depending on the level of investment opportunities (internal growth or
acquisition opportunities) that are available to OC. At June 30, 2014, the company had
7.7 million shares remaining under its repurchase programs.
In February 2014, the board approved an initial quarterly dividend of 16 cents per share
payable on April 3, 2014.
October 10, 2014
53
Corporates
Financial Summary — Owens Corning Corporation
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Total Secured Debt/Operating EBITDA
Total Secured Debt/FFO
FCF/Total Adjusted Debt
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Cash Flow
FFO
Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
2010
2011
2012
2013
LTM
6/30/14
722
14.4
11.0
3.5
770
14.4
12.3
(2.9)
611
11.8
8.1
0.0
747
14.1
10.3
1.2
721
13.8
9.4
(1.5)
5.3
6.6
3.6
2.4
1.6
6.5
7.1
4.3
(0.3)
0.7
3.8
5.4
2.7
0.9
1.0
5.2
6.7
3.4
1.5
1.2
5.0
6.4
3.3
0.3
0.8
—
—
2.3
3.4
2.8
7.9
—
—
2.5
3.3
3.0
(6.0)
—
—
3.4
5.3
3.9
(0.1)
—
—
2.7
4.0
3.2
2.4
—
—
3.2
4.6
3.7
(2.6)
6
0
1,629
—
—
—
1,635
560
2,195
32
0
1,930
—
—
—
1,962
592
2,554
9
141
1,935
—
—
—
2,085
632
2,717
4
162
1,862
—
—
—
2,028
664
2,692
21
212
2,059
—
—
—
2,292
666
2,958
468
20
488
—
(314)
—
174
65
(602)
(120)
(29)
(512)
52
—
594
(305)
289
—
(442)
—
(153)
81
304
(138)
(94)
—
52
—
321
9
330
—
(332)
—
(2)
59
55
(113)
4
3
55
—
476
(58)
418
—
(353)
—
64
52
(28)
(63)
30
2
57
—
453
(140)
313
—
(370)
(19)
(76)
93
24
(98)
66
9
81
—
4,997
4.0
402
110
5,335
6.8
452
108
5,172
(3.1)
262
114
5,295
2.4
415
112
5,231
1.9
392
112
a
October 10, 2014
54
Corporates
PPG Industries, Inc. (Analyst: Robert G. Rulla)
Company Overview
Founded in 1883, PPG Industries (NYSE: PPG) is a global supplier of paints, coatings,
specialty materials, glass and fiberglass. Fitch estimates that PPG’s exposure to the
construction market represents about 33% of its worldwide end markets’ sales, with more than
half of the total directed to the U.S. construction market. PPG comprises three business
segments: Performance Coatings (56% of 2013 sales); Industrial Coatings (37%); and Glass
(7%).
Portfolio Transformation
Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less
cyclical growth and lower capital intensity. The acquisition of SigmaKalon Group (SK) in 2008
reflects PPG’s transformation into primarily a coatings and specialty products company, and
enhanced its geographic footprint.
On Jan. 28, 2013, PPG completed the separation of its commodity chemicals business in a taxefficient Reverse Morris Trust transaction. This business unit had 2012 sales of $1.7 billion
(11.1% of total company sales) and $368 million of pretax earnings. PPG received $900 million
of cash as well as $67 million in cash for a preliminary post-closing working capital adjustment.
On April 1, 2013, PPG completed the acquisition of the North American architectural coatings
business of Akzo Nobel N.V. Amsterdam for $957 million, net of cash acquired. Akzo Nobel’s
North American architectural coatings business is the second-largest in the U.S. and has a
leading market position in Canada. This business had $1.5 billion of sales during 2011, with
roughly 60% derived from the U.S. and the remaining 30% and 10% from Canada and the
Caribbean, respectively. Similar to PPG’s U.S. architectural coatings business, Akzo Nobel has
strong participation in all three distribution channels. Akzo Nobel has 600 company-owned
stores and also markets its products through major national home centers and independent
distributors. The combined operations increased PPG’s company-owned stores from 400 to
roughly 1,000 and expand the company’s branded paint product offerings to a total of more
than 8,000 retail outlets and 6,000 independent distributors. Following the close of the
acquisition, PPG closed redundant stores and currently has approximately 900
company-owned stores.
On March 31, 2014, PPG completed the divestiture of its 51% interest in Transitions Optical to
Essilor International S.A. In 2013, Transitions Optical had net sales of approximately
$870 million. PPG received cash of roughly $1.73 billion pretax ($1.5 billion after-tax) at the
close of the transaction.
On June 30, 2014, PPG announced that it has reached an agreement to acquire Consorcio
Comex, S.A. de C.V. (Comex) for $2.3 billion. Founded in 1952, Comex is a privately held
architectural and industrial coatings company headquartered in Mexico City, Mexico. The
company manufactures coatings and related products in Mexico and sells them in Mexico and
Central America through approximately 3,600 stores that are independently owned and
operated by more than 700 concessionaires (independent dealers). Comex also sells its
products through regional retailers, wholesalers and direct-sales customers. The company has
approximately 3,900 employees, eight manufacturing facilities and six distribution centers, and
had sales of approximately $1 billion in 2013.
October 10, 2014
55
Corporates
Liquidity and FCF
As of June 30, 2014, PPG had $1.99 billion of unrestricted cash, $927 million of short-term
investments and no borrowings under its $1.2 billion revolving credit facility. While PPG has
sufficient cash and short-term investments to fund the Comex acquisition, management
indicated that it may fund part of the purchase price with debt.
Fitch believes the company will continue to have sufficient liquidity following the completion of
the Comex acquisition to meet financial obligations, including EUR300 million of notes maturing
in mid-2015 as well as obligations under its asbestos litigation, should the proposed settlement
become effective.
PPG also generates strong FCF. For the LTM period ending June 30, 2014, the company
generated $697 million of FCF, compared with $841 million during 2013, $1.02 billion during
2012 and $691 million during 2011. Fitch expects FCF will represent approximately 4%–5% of
sales in 2014 and 2015.
Credit Metrics
Leverage at the end of the June 2014 quarter was 1.4x, flat from year-end 2013. EBITDA to
interest was 12.1x for the June 30, 2014, LTM period compared with 11.5x during 2013.
Fitch expects leverage will increase slightly at the end of 2014 but will remain appropriate for
the current rating. Fitch projects leverage will settle between 1.5x and 1.75x at year-end 2014,
depending on the amount of debt issued for the acquisition. This forecast assumes no EBITDA
contribution from the Comex acquisition. Fitch projects PPG leverage will be at or below 1.5x at
the end of 2015, and that interest coverage will remain above 12x during 2014 and 2015.
Asbestos Litigation
PPG has been a defendant in lawsuits involving asbestos claims for more than 30 years,
mostly related to its 50% ownership of Pittsburgh Corning Corporation (PC), a 50-50 venture
owned by PPG and Corning Incorporated. Under the terms of the current settlement
arrangement, PPG would make aggregate cash payments of approximately $825 million
(payable according to a fixed payment schedule over a period ending 2023), contribute
1.4 million shares of its stock and convey the stock it owns in PC to a trust. The company has
taken charges totaling $942 million for the estimated cost of the settlement arrangement. If the
settlement becomes effective, Fitch believes that PPG has sufficient cash and CP/bank
revolver availability to meet the required cash payments.
On Sept. 30, 2014, the U.S. District Court for the Western District of Pennsylvania issued a
memorandum opinion and order confirming the current PC plan of reorganization. The final
confirmation order is subject to a customary appeals process and, if the confirmation order is
upheld and all conditions are met, the plan of reorganization would become effective.
October 10, 2014
56
Corporates
Financial Summary — PPG Industries Inc.
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Cash Flow
FFO
Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
2010
2011
2012
2013
LTM
6/30/14
1,888
14.1
15.2
4.8
2,176
14.6
20.7
4.6
2,414
15.9
19.2
6.7
2,366
15.7
18.5
5.6
2,453
15.9
17.0
4.5
7.1
9.6
3.8
3.7
4.3
8.4
9.9
4.5
2.8
3.7
8.7
11.1
4.7
1.4
4.3
9.2
11.5
4.6
4.4
3.5
9.6
12.1
4.7
1.4
3.1
—
—
2.2
4.2
3.2
9.4
—
—
1.7
3.2
2.7
10.5
—
—
1.7
3.2
2.6
14.8
—
—
1.4
3.0
2.5
12.9
—
—
1.4
3.0
2.4
10.5
28
—
4,043
—
—
—
4,071
2,771
6,842
108
—
3,574
—
—
—
3,682
2,916
6,598
642
—
3,368
—
—
—
4,010
2,880
6,890
34
—
3,372
—
—
—
3,406
3,120
6,526
425
—
2,958
—
—
—
3,383
3,267
6,650
1,189
121
1,310
0
(307)
(360)
643
(8)
736
(440)
(647)
284
1,341
637
1,616
(180)
1,436
0
(390)
(355)
691
(23)
(391)
(777)
616
116
1,457
25
1,678
109
1,787
0
(411)
(358)
1,018
(80)
193
30
(1,312)
(151)
1,306
1,087
1,743
66
1,809
(18)
(515)
(435)
841
(983)
(612)
(932)
1,496
(190)
1,116
629
1,791
40
1,831
(133)
(592)
(409)
697
1,591
(10)
(1,096)
(439)
743
1,986
927
13,423
9.7
1,418
196
14,885
10.9
1,709
219
15,200
2.1
1,949
218
15,108
(0.6)
1,891
206
15,400
3.2
1,975
202
a
Includes 8.0x gross rent and asbestos liabilities.
October 10, 2014
57
Corporates
RPM International Inc. (Analyst: Robert G. Rulla)
Company Overview
RPM International Inc. (NYSE: RPM) is a holding company with a portfolio of businesses that
produce and market various specialty chemical product lines — including high-quality specialty
paints, protective coatings, roofing systems, sealants and adhesives — focusing on the
maintenance and improvement needs of both the industrial and consumer markets. The company’s
products include those marketed under well-known brand names such as Rust-Oleum, Carboline,
DAP, Flowcrete, Stonhard and Tremco.
End-Markets
The company markets its products within roughly 160 countries and territories, with about 67%
of sales generated in North America, 23% in Europe and 10% in developing economies.
RPM’s Industrial Segment, which generated fiscal 2014 sales of $2.77 billion (63.3% of total
revenues), markets its products throughout North America and accounts for a majority of its
international sales. Management estimates that about 60% of this segment’s sales are directed
to the commercial and industrial repair and maintenance segment while 40% are targeted to
the new commercial construction sector.
Growth Strategy
RPM uses acquisitions to augment its organic growth. The company largely relies on internally
generated cash and, to some extent, borrowings, to fund its acquisition activities. The company
uses equity in the form of either secondary offerings or convertibles that are allowed to convert
to equity to fund larger acquisitions. RPM typically targets small, bolt-on acquisitions that are
usually adjacent products and/or geographic extensions.
During fiscal 2014, the company spent $39.2 million (net of cash acquired) on four acquisitions.
RPM expended $397.4 million on six acquisitions during fiscal 2013.
Credit Metrics
Debt to EBITDA at the end of its 2014 fiscal year (ending May 31, 2014) stood at 2.3x,
compared with 2.9x at the end of fiscal 2013 and 2.4x at the conclusion of fiscal 2012. Interest
coverage was 7.1x for fiscal 2014 compared with 6x for fiscal 2013 and 6.4x for fiscal 2012.
Liquidity and FCF
RPM maintains solid liquidity with cash of $332.9 million and about $800 million of borrowing
availability under its unsecured revolving credit agreement and accounts receivable
securitization program. The company has no major debt maturities until 2015, when
$150 million of senior notes become due.
FCF declined during fiscal 2014 to $58.7 million compared with $159.5 million during
fiscal 2013 and $111.1 million during fiscal 2012.
Asbestos Litigation
A subsidiary of RPM has exposure to asbestos claims. On May 31, 2010, Bondex, a subsidiary
of RPM and its direct holding company, SPHC, filed for Chapter 11 bankruptcy protection to
resolve all pending and future asbestos lawsuits. Neither RPM nor any of its operating
subsidiaries were part of the filing.
October 10, 2014
58
Corporates
In July 2014, RPM entered into an agreement in principle with the official representatives of
current and future claimants that would resolve all present and future asbestos personal injury
claims related to Bondex and other related entities. The agreement contemplates the filing of a
plan or plans of reorganization with the U.S. Bankruptcy Court in Delaware. The plan will be
subject to approval of the claimants, as well as the bankruptcy court.
Under the terms of the agreement in principle, a trust (or trusts) will be established under
Section 524(g) of the U.S. Bankruptcy Code for the benefit of current and future asbestos
personal injury claimants. Upon effectiveness of the plan, the trust will be funded with
$450 million of cash and one or more promissory notes (bearing no interest) and maturing on
or before the fourth anniversary of the effective date. The plan shall provide for the following
contributions to the trust:
$450 million upon the effective date;
On or before the second anniversary of the effective date of the plan, an additional
$102.5 million in cash, RPM stock or a combination of both, at the discretion of RPM,
will be deposited to the trust;
On or before the third anniversary of the effective date, an additional $120 million in
cash, RPM stock, or a combination of both, and;
On or before the fourth anniversary of the effective date, a final payment of $125
million in cash, RPM stock, or a combination of both.
Although the initial payment is expected to initially increase the company’s debt levels, Fitch
views the agreement in principle positively as this could possibly resolve the uncertainty
regarding potential liabilities associated with the asbestos claims.
October 10, 2014
59
Corporates
Financial Summary — RPM International Inc.
($ Mil., Fiscal Years Ended May 31)
2011
2012
2013
2014
Profitability
Operating EBITDA
418
460
477
576
12.3
12.2
11.7
13.2
13.7
12.3
14.3
14.0
2.7
2.9
3.9
1.3
5.3
4.1
5.0
5.1
6.4
6.4
6.0
7.1
3.6
3.0
3.5
3.5
2.3
2.5
2.8
1.6
6.0
4.1
4.0
3.0
—
—
—
—
—
—
—
—
2.7
2.4
2.9
2.3
3.7
4.2
3.9
3.8
3.1
2.9
3.3
2.8
6.2
7.7
9.1
3.3
FCF Margin (%)
Coverages (x)
Leverage (x)
Balance Sheet
Short-Term Debt
3
3
5
6
1,098
1,105
1,361
1,346
Other Debt
9
8
8
0
Equity Credit
0
0
0
0
1,109
1,116
1,374
1,352
331
325
372
407
1,440
1,440
1,746
1,759
FFO
285
231
325
340
(46)
64
44
(62)
238
295
369
278
0
0
0
0
(40)
(72)
(91)
(94)
(109)
(112)
(118)
(126)
90
111
160
59
(38)
(161)
(397)
(36)
Net Debt Proceeds
176
(8)
252
(7)
Net Equity Proceeds
(10)
3
4
(5)
1
(64)
10
(22)
220
(119)
28
(11)
435
316
344
333
3,382
3,777
4,079
4,376
(0.9)
11.7
8.0
7.3
345
387
394
486
65
72
80
81
Cash Flow
Dividends
FCF
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
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Corporates
The Sherwin-Williams Company (Analyst: Robert G. Rulla)
Company Overview
Founded in 1866, The Sherwin-Williams Company (NYSE: SHW) is the largest coatings
manufacturer in the U.S. and the third-largest worldwide. The company is structured in four
business segments: the Paint Stores Group (59% of 2013 sales); Consumer Group (13%);
Global Group (20%); and Latin America Coatings Group (8%). The Paint Stores Group is the
exclusive North American distributor of Sherwin-Williams branded paints and related products.
The Consumer Group sells paints, coatings and related products under various branded names
(Dutch Boy, Pratt & Lambert, Martin-Senour, Thompson, Minwax, Krylon, etc.) and private
labels. The Global Group develops, manufactures, distributes and sells a variety of paint and
coatings products worldwide. Fitch estimates that 70% of SHW’s sales are to the home and
nonresidential buildings improvement markets.
Distribution Network
SHW had a network of 3,908 company-operated paint stores and 582 company-operated
branches as of Dec. 31, 2013. The company is unique in that most of its competitors distribute
their products through big box retailers, hardware stores and mass merchandisers. The
networks of competitor paint companies that distribute through company-owned stores are not
as extensive as that of SHW. Fitch views this as an advantage, as the company can directly
control marketing, merchandising, service and price decisions at its stores. Additionally, SHW
also distributes through big box home centers and mass merchandisers, primarily reaching the
DIY customer segment. The company estimates that about 75% of its sales are through its
controlled distribution platform, with the remaining 25% through independent retailers.
Growth Strategy
The company seeks to expand its distribution platform by opening new stores and pursuing
acquisition opportunities. In a solidly expanding economy, management plans to expand the
store base at an average of 3% per year (100-plus stores annually). However, the pace of store
expansion has been slower over the past six years as demand slowed and the company closed
redundant stores from previous acquisitions. Management plans to open between 80–90 net
new stores this year.
In September 2013, SHW completed the acquisition of the U.S./Canada business of Consorcio
Comex, S.A. de C.V. (Comex) for $90 million in cash and the assumption of liabilities valued at
about $75 million. In April 2014, SHW terminated the stock purchase agreement to acquire the
Mexico business of Comex after the Federal Competition Commission of Mexico twice rejected
the proposed acquisition due to concerns that the transaction would reduce competition in the
Mexican paint market.
Fitch believes SHW will continue to pursue acquisition opportunities to grow its business. The
acquisition of the U.S. and Canadian operations of Comex last year added 306 companyoperated paint stores to the company’s network, increasing SHW’s store presence in key
markets. This acquisition will contribute about $450 million to total revenues this year.
Credit Metrics
Debt to EBITDA at the end of the June 2014 quarter was 1.2x, compared with 1.2x at year-end
2013 and 1.4x at the end of 2012. Adjusted debt to EBITDAR was 2.4x for the June 30, 2014,
LTM period compared with 2.5x at the end of 2013 and 2.7x at year-end 2012. Fitch expects
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Corporates
debt to EBITDA and adjusted debt to EBITDAR will be 1.0x and 2.4x, respectively, at the end
of 2014.
Interest coverage remains solid at 22.2x for the LTM period ending June 30, 2014, compared
with 22.2x during 2013 and 29.4x in 2012. Fitch expects interest coverage will settle around
23.0x in 2014. FFO fixed charge coverage was 3.7x for the LTM period ending June 30, 2014,
compared with 3.6x during 2013 and 3.7x during 2012. Fitch expects FFO fixed-charge
coverage will be approximately 3.5x during 2014.
Liquidity and FCF
SHW maintains solid liquidity with cash of $267.2 million and no borrowings under its
$1.05 billion CP program that is backed by SHW’s $1.05 billion revolving credit facility. SHW
also has three U.S. revolving and letter of credit facilities totaling $1 billion, a EUR95 million
credit facility and a C$150 Canadian credit facility. The company has $500 million of debt
coming due in December 2014, which is expected to be repaid from cash on hand, short-term
borrowings and FCF.
Cash flow generation remains strong with FCF totaling $741.3 million for the LTM period
ending June 30, 2014, compared with $712 million of FCF during 2013 and $569.8 million of
FCF during 2012. Fitch projects SHW will generate between $500 million and $550 million of
FCF during 2014.
Lead-Based Paint Litigation Risks
SHW and other companies are or were defendants in legal proceedings seeking recovery
related to lead-based paint litigation. On Dec. 16, 2013, a California Superior Court judge
ordered SHW and two other companies (ConAgra Grocery Products Co. and NL Industries,
Inc.) to pay $1.15 billion into a fund to be used to clean up hazards from lead-based paint in
homes in California. The Santa Clara County, CA, proceeding was initiated in March 2000 by
10 counties and cities in California and asserted a claim for public nuisance, alleging that the
presence of lead products for use in paint and coatings in, on and around buildings in the
plaintiffs’ jurisdictions constitutes a public nuisance. The court entered final judgment on
Jan. 27, 2014, holding the defendants jointly and severally liable to pay $1.15 billion into the
fund to abate the public nuisance.
On March 28, 2014, the company filed a notice of appeal to the Sixth District Court of Appeal
for the State of California. The filing of the notice of appeal effects an automatic stay of the
judgment without the requirement to post a bond. Management believes that a decision by the
Court of Appeals will take approximately two to three years.
Aside from the potential liability associated with the abatement costs, there is also the
increased possibility that the California decision could have broader ramifications by
encouraging similar legal actions from other states and/or municipalities. Following the
February 2006 jury verdict against SHW and other defendants in Rhode Island in a similar
public nuisance case, the State of Ohio and several cities in Ohio individually initiated
proceedings in state court in 2006 and 2007 against SHW and other companies asserting
claims for public nuisance. Those actions in Ohio were subsequently voluntarily dismissed by
the plaintiffs after the Rhode Island Supreme Court reversed the public nuisance judgment
against the company and the other defendants in 2008.
October 10, 2014
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Corporates
Financial Summary — The Sherwin-Williams Company
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Cash Flow
FFO
Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
2010
2011
2012
2013
LTM
6/30/14
971
12.5
20.1
5.5
1,013
11.6
21.7
4.9
1,260
13.2
21.9
6.0
1,395
13.7
23.2
7.0
1,448
13.5
24.9
6.9
10.0
13.7
2.8
1.1
5.2
17.9
23.8
3.1
1.2
4.4
23.4
29.4
3.7
5.3
5.6
17.4
22.2
3.6
1.2
6.5
17.3
22.2
3.7
1.3
6.9
—
—
1.1
3.3
2.6
12.9
—
—
1.0
3.2
2.6
12.9
—
—
1.4
3.2
2.7
13.6
—
—
1.2
3.1
2.5
16.4
—
—
1.2
3.0
2.4
17.2
397
648
217
217
1,045
2,258
3,303
354
639
160
160
993
2,340
3,333
73
1,632
101
101
1,705
2,481
4,186
600
1,122
40
40
1,722
2,621
4,343
567
1,122
6
6
1,689
2,621
4,310
636
18
653
53
(125)
(156)
425
(290)
191
(274)
(63)
(11)
59
717
(44)
673
63
(154)
(154)
429
(32)
(52)
(298)
(73)
(26)
33
959
(71)
888
0
(157)
(161)
570
(90)
701
(337)
(15)
830
863
1,030
54
1,084
0
(167)
(205)
712
(77)
21
(700)
(75)
(118)
745
1,066
47
1,113
0
(162)
(211)
741
(74)
7
(1,114)
(34)
(474)
267
7,776
9.6
795
71
8,766
12.7
832
43
9,535
8.8
1,081
43
10,186
6.8
1,207
63
10,714
10.4
1,254
65
October 10, 2014
63
Corporates
Stanley Black & Decker, Inc. (Analyst: Robert G. Rulla)
Company Overview
Incorporated in 1852, Stanley Black & Decker, Inc. (NYSE: SWK) is a diversified global
supplier of hand tools, power tools and related accessories, mechanical access solutions and
electronic security solutions. On March 12, 2010, the company completed its merger with The
Black & Decker Corporation (BDK), a leading global manufacturer and marketer of power tools
and accessories, hardware and home improvement products, and technology-based fastening
systems.
End Markets
The company’s operations are classified into three business segments: Security, Industrial and
Construction and DIY. SWK supplies security solutions for commercial and industrial use,
professional industrial tools and branded consumer products. Management estimates the U.S.
residential repair and remodel sector accounted for roughly 10% of its 2013 pro forma
revenues.
Growth Strategy
The company has pursued a growth strategy that has resulted in geographic, end-market and
customer diversification. Sales outside of the U.S. now account for roughly 53% of total
revenues, up from roughly 43% in 2008.
In December 2012, SWK sold its Hardware & Home Improvement Group (HHI) to Spectrum
Brand Holdings, Inc. for approximately $1.4 billion in cash. HHI is a provider of residential
locksets, residential builders’ hardware and plumbing products. Approximately 90% of the
revenues from these businesses were generated from North America and more than 50% of
the revenues were from U.S. home centers. The net proceeds from this divestiture were used
to repurchase $850 million of the company’s common stock and for debt reduction.
On Feb. 27, 2013, the company acquired Infastech Ltd. for a total price of $826.4 million.
Infastech is a leading global manufacturer and distributor of specialty engineered fastening
technologies based in Hong Kong. With revenues of approximately $500 million, Infastech is
one of the largest Asia-based global players in the specialty mechanical fastener market. More
than half of Infastech’s 2011 revenues were generated in the Asia-Pacific region and combined
with SWK’s engineered fastening platform, generates about 36% of its revenues from the highgrowth region. Total company revenues from emerging markets increased to approximately
17%, which is an important step toward SWK’s mid-decade goal of 20-plus%.
Fitch is somewhat concerned that the company continues to make acquisitions at a time when
it is still integrating large acquisitions. The sizable Black & Decker acquisition, completed in
2010, has only been recently fully integrated. Yet, since 2010, the company has completed
21 other acquisitions, including the purchase of two sizable entities. During the third quarter of
2011, the company completed the $1.2 billion acquisition of Niscayah AB, a commercial
security firm based in Sweden specializing in electronic security systems. In July 2010, SWK
also completed the $451.6 million acquisition of CRC-Evans International, a supplier of
specialized tools, equipment and services used in the construction of large-diameter oil and
natural gas transmission pipelines.
The integration risks are mitigated by management’s integration expertise as well as the fact
that assimilation activities will occur in different business segments, allowing each segment’s
management team to focus specifically on each individual acquisition. Furthermore, integration
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Corporates
remains a top priority, and management indicated last year that it plans to curtail any other
major bolt-on acquisition activity for a period of at least 12 24 months while it completes its
ongoing integration activities.
Leverage
SWK’s leverage remains high at 2.2x for the LTM period ending June 28, 2014, flat compared
with year-end 2013. EBITDA to interest coverage was 10.2x for the LTM period ending
June 28, 2014.
While these credit metrics are weak for the rating category, Fitch expects SWK’s financial
results and credit metrics will improve in 2014 as the U.S. housing and commercial
construction markets continue their moderate recoveries. Additionally, SWK’s profitability
should benefit from restructuring and integration initiatives that have been implemented. Fitch
projects leverage will be below 2.0x by the end of 2014.
Liquidity
The company has solid liquidity, with cash of $515.7 million and approximately $1.5 billion of
borrowing availability under its $2 billion CP program as of June 28, 2014. The CP program is
backed by the company’s $1.5 billion revolving credit facility that expires in 2018. The company
has not drawn on its revolving credit facility. SWK’s $500 million, 364-day facility expired in
June 2014.
FCF totaled $485.3 million for the June 28, 2014, LTM period compared with $189.7 million
during fiscal 2013, $276.2 million during fiscal 2012 and $420.9 million during fiscal 2011.
European Exposure
The company’s operations are exposed to the economic difficulties in Europe. Management
estimates that approximately 26% of the company’s 2013 revenues were derived from Europe,
Middle East and Africa (EMEA). SWK’s EMEA sales activities are somewhat concentrated in
more stable economies such as France, the Nordic regions, Germany and the U.K. During the
second quarter of 2014, organic growth in the EMEA region improved 1% compared with the
year-earlier quarter, following a 4% improvement during the first quarter of 2014.
October 10, 2014
65
Corporates
Financial Summary — Stanley Black & Decker, Inc.
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Cash Flow
FFO
Common Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
1/1/11
12/31/11
12/31/12
12/28/13
LTM
6/28/14
1,291
15.4
6.9
4.2
1,630
15.7
9.9
4.1
1,599
15.7
10.2
2.7
1,636
14.9
10.6
1.7
1,719
15.4
13.5
4.3
6.0
11.7
3.1
0.9
4.0
7.2
11.6
4.0
0.8
3.3
7.1
11.1
4.0
2.7
2.5
7.2
10.2
4.2
0.6
2.4
9.3
10.2
5.4
1.0
3.5
—
—
2.7
5.8
3.2
7.5
—
—
2.1
4.0
2.6
9.0
—
—
2.0
3.7
2.5
6.3
—
—
2.2
3.7
2.7
3.9
—
—
2.2
2.9
2.7
9.8
418
—
3,033
—
—
—
3,451
1,256
4,707
527
—
2,293
633
—
—
3,452
1,208
4,660
12
—
2,144
1,383
—
375
3,163
1,190
4,353
403
—
1,672
2,128
—
575
3,627
1,209
4,836
484
—
1,721
2,128
—
575
3,758
1,209
4,967
551
188
739
—
(186)
(202)
352
410
234
392
(43)
1,345
1,745
—
869
130
999
—
(302)
(276)
421
(1,123)
(182)
109
(63)
(839)
907
—
877
90
966
—
(386)
(304)
276
563
82
(951)
3
(26)
716
—
1,010
(142)
868
—
(366)
(313)
190
(836)
813
115
(502)
(220)
496
—
1,405
(289)
1,117
—
(317)
(314)
485
(18)
(374)
392
(531)
(46)
516
—
8,410
125.0
942
110
10,376
23.4
1,220
140
10,191
(1.8)
1,153
144
11,001
8.0
1,194
160
11,171
10.8
1,267
168
October 10, 2014
66
Corporates
USG Corporation (Analyst: Robert G. Rulla)
Company Overview
Established in 1902, USG Corporation (NYSE: USG) is a vertically integrated manufacturer
and distributor of building materials used in new residential, new commercial, and repair and
remodel construction, as well as certain industrial products. USG is organized into three
operating segments: North American Gypsum (55% of 2013 sales), Building Products
Distribution (30%), and Worldwide Ceilings (15%). USG markets its products primarily to the
construction industry, with 25% of the company’s net sales directed toward new residential
construction, 24% derived from new nonresidential construction, 49% from the repair and
remodel segment (commercial and residential), and 2% from other industrial products.
USG Boral Building Products
On Feb. 27, 2014, USG formed a 50/50 joint venture, USG Boral Building Products (UBBP),
with Boral Limited. The JV will leverage the two companies’ brands, complementary
geographic footprints and technological expertise. The JV is valued at $1.6 billion, with Boral
contributing its Gypsum division, valued at $1.35 billion, to the JV and USG contributing assets
valued at $250 million, which include its Asian and Middle Eastern businesses, as well as
exclusive access to USG’s technologies in the JV’s territory. In addition, USG will pay Boral
cash payments of up to $575 million, of which $513 million was paid at closing ($500 million
base price and $13 million of working capital adjustments), and, subject to achieving earnings
targets, $25 million on the third anniversary and $50 million on the fifth anniversary. The JV is
targeted to be self-funding with the ability to borrow in its own right with dividend distribution
targeted at 50% of after-tax profit, taking into consideration the growth needs of the JV.
Management estimates USG’s share of the JV income will be roughly $35 million $45 million in
2014.
Demand, Utilization and Pricing
Industry wallboard shipments in the U.S., as reported by the Gypsum Association, grew about
5.8% to 5.5 billion sf during second-quarter 2014, compared with 5.2 billion sf during secondquarter 2013. Shipments during first-half 2014 increased roughly 4.8% to 9.93 billion sf
compared with 9.48 billion sf during the first six months of 2013. USG estimates industry
capacity utilization rates improved but remained low, averaging approximately 60% during
first-half 2014 compared with 58% during first-quarter 2013 and 73% during fourth-quarter
2013.
For all of 2013, wallboard shipments increased 8.3% to 20.9 billion sf, compared with
19.3 billion sf in 2012. In 2012, shipments improved approximately 10% following 1.2% growth
to 17.5 billion sf during 2011. The Gypsum Association estimates industry shipments fell 6% to
17.3 billion sf in 2010, following a 27% decline in 2009, a 17.9% drop in 2008 and a 15%
decrease in 2007. USG estimates industry capacity utilization rates were 64% during 2013, up
from 58% in 2012, 53% in 2011 and 51% in 2010. Capacity utilization rates were 52% in 2009,
62% in 2008 and 77% in 2007.
USG’s wallboard shipments grew about 2.3% during second-quarter 2014 to 1.32 billion sf,
which is below the industry shipment growth of 5.8% during the quarter. Management indicated
the company’s quarterly volume lagged the industry growth primarily due to customer mix and
geographic exposure to markets that grew slower compared with the national average. For the
first six months of 2014, USG’s wallboard shipments totaled 2.47 billion sf, a 3.4% increase
over the same period during 2013. Based on industry data, USG estimates it had a 26%
October 10, 2014
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Corporates
market share during second-quarter 2014, flat on a year-over-year basis but down slightly from
the estimated 27% market share it had during first-quarter 2014.
At the end of 2011, major manufacturers announced that they were eliminating the practice of
job quotes. In the past, job quotes provided pricing protection for customers, particularly for
large projects. However, this practice limited the realization of price increases implemented by
manufacturers. These manufacturers implemented pricing increases at the beginning of 2012,
2013 and 2014.
These pricing increases have generally been successful, as evidenced by the significant yearover-year improvement in average wallboard prices reported by USG. The company’s average
wallboard price increased 18.4% in 2012 and 17% during 2013. USG’s average wallboard price
during the second quarter of 2014 was $167.31 per thousand sf, 8.8% above the average price
during the second quarter of 2013.
Credit Metrics
USG’s credit metrics have been improving over the past few years. Debt to EBITDA at the end
of the June 2014 quarter was 4.8x, compared with 5.4x at year-end 2013 and 8.7x at the end of
2012. Interest coverage was at 2.4x for the LTM period ending June 30, 2014, compared with
2.1x during 2013 and 1.3x in 2012.
Liquidity
USG maintains strong liquidity, with cash of $235 million, short-term marketable securities of
$79 million, long-term marketable securities totaling $59 million, and $264 million of borrowing
availability under its various credit facilities as of June 30, 2014. The company has no major
debt maturities until 2016, when $500 million of senior notes become due.
In December 2013, USG converted $325 million of its 10% convertible senior notes due 2018
into approximately 28.5 million common shares. In April 2014, the company converted the
remaining $75 million of these notes into approximately 6.6 million common shares.
In connection with the UBBP joint venture, USG issued $350 million of 5.875% senior notes in
October 2013, together with cash on hand, to fund the cash payment portion of the JV to Boral
Limited.
October 10, 2014
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Corporates
Financial Summary — USG Corporation
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Cash Flow
FFO
Common Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
2010
2011
2012
2013
LTM
6/30/14
51
1.7
3.6
(4.5)
65
2.1
3.5
(8.2)
264
8.2
10.5
0.2
435
12.2
12.6
(1.3)
474
13.0
13.0
0.2
0.2
0.3
0.5
0.3
(2.4)
0.1
0.3
0.4
(0.2)
(3.5)
1.1
1.3
1.1
1.0
1.0
1.9
2.1
1.6
0.6
0.6
2.1
2.4
1.8
0.8
1.0
—
—
45.3
23.3
21.5
(4.4)
—
—
35.4
27.0
20.3
(8.5)
—
—
8.7
9.5
8.6
0.3
—
—
5.4
6.5
5.8
(1.6)
—
—
4.8
6.0
5.2
0.2
7
—
2,301
—
—
—
2,308
720
3,028
7
—
2,297
—
—
—
2,304
640
2,944
4
—
2,305
—
—
—
2,309
584
2,893
63
—
2,238
—
54
—
2,355
584
2,939
63
—
2,207
—
—
—
2,270
586
2,856
(143)
49
(94)
—
(39)
—
(133)
23
343
(1)
(293)
(61)
629
128
(182)
(12)
(194)
—
(55)
—
(249)
9
(6)
(3)
(15)
(264)
365
164
26
42
68
10
(70)
—
8
71
(35)
(2)
139
181
546
106
179
(99)
80
(2)
(124)
—
(46)
(15)
351
(5)
(21)
264
810
82
210
(65)
145
(2)
(136)
—
7
16
351
5
(560)
(181)
235
79
2,939
(9.1)
(127)
183
3,024
2.9
(101)
211
3,224
6.6
108
206
3,570
10.7
280
203
3,638
9.7
319
195
October 10, 2014
69
Corporates
Whirlpool Corporation (Analyst: Robert G. Rulla)
Incorporated in 1955, Whirlpool Corporation (NYSE: WHR) is the world’s leading manufacturer
and marketer of major home appliances. WHR manufactures products in 11 countries under
brand names such as Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Bauknecht, Brastemp
and Consul.
On March 31, 2006, WHR completed its acquisition of the Maytag Corporation. With the
acquisition, the company added an array of home appliance brands, including Maytag, Jenn-Air,
and Amana. In addition to those, WHR’s major brands include Whirlpool, KitchenAid, Brastemp,
Consul and Bauknecht. WHR maintains market-leading positions in the U.S. and Brazil, and
the Whirlpool brand is the world’s No. 1 appliance brand. WHR benefits from a broad product
line, high brand recognition and significant manufacturing and marketing expertise. Its
innovation capabilities have enabled it to successfully introduce new products, provide a
pipeline for sales growth, improve product mix, and compete more effectively around the world.
During 2013, 54% of revenues were generated in North America, 16% in Europe, Middle East
and Africa, 26% in Latin America, and 4% in Asia.
Acquisition Activity
In July 2014, WHR entered into binding agreements to acquire a majority interest in Indesit
Company S.p.A. (Indesit) for approximately $1.038 billion. The acquisition of the controlling
interest in Indesit is subject to judicial and antitrust approvals and is expected to close by the
end of 2014.
Founded in 1975, Indesit is one of the leading European manufacturers and distributors of
major appliances. Indesit has eight industrial sites (in Italy, Poland, the U.K., Russia and
Turkey) and approximately 16,000 employees. During fiscal 2013, Indesit had sales of
EUR2.67 billion and EBITDA of approximately EUR178.5 million. The company generated
about 56% of revenues from Western Europe, 38% from Eastern Europe and 6% from nonEuropean markets.
The proposed acquisition has good strategic rationale for WHR. Indesit provides Whirlpool with
a broader platform to expand its operations in Europe. Currently, about 16% of Whirlpool’s
revenues are generated from this region. On a pro forma basis (including Indesit), sales from
EMEA will represent about 29% of Whirlpool’s worldwide sales.
In August 2013, WHR’s wholly owned subsidiary, Whirlpool (China) Investment Co., Ltd.,
reached agreements to acquire a 51% equity stake in Hefei Rongshida Sanyo Electric Co., Ltd.
for an aggregate purchase price of RMB3.4 billion (approximately $547 million as of
June 30, 2014). This transaction gives WHR access to a large established distribution network,
manufacturing scale, access to the China supply base as well as experienced management
team.
Credit Metrics
The company’s leverage, as measured by debt to EBITDA, stood at 1.4x during the LTM
ending June 30, 2014, 1.2x at the end of 2013, and 1.5x at year-end 2012. Total adjusted debt
to EBITDAR was 2.3x for the LTM ending June 30, 2014, compared with 2.1x at year-end 2013,
and 2.5x at the end of 2012. Interest coverage improved to 11.5x for the LTM ending
June 30, 2014, from 11.2x in 2013 and 8.3x in 2012.
October 10, 2014
70
Corporates
Fitch expects the company’s leverage will increase as a result of the two pending acquisitions.
Fitch estimates the company’s debt to EBITDA could be in excess of 2x by year-end 2015,
depending on the amount of the acquisition price that will be funded by debt.
Liquidity
WHR had solid liquidity with cash of $945 million as of June 30, 2014, and no borrowings under
its $1.725 billion revolving credit facility maturing in June 2016. Fitch expects WHR will have
continued access to its multiyear revolving credit facility as it has sufficient room under the
covenant requirements of the revolver.
A majority of the company’s cash is held in foreign countries (approximately 95% of cash as of
Dec. 31, 2013, was held overseas). WHR’s intent is to permanently reinvest these funds
outside the U.S. and the company’s current plans do not demonstrate the need to repatriate
these funds to support U.S. operations.
The company has significant debt maturing over the next four years, with roughly $1.6 billion
coming due between 2014 and 2017. WHR has demonstrated its ability to access the capital
markets and refinance its debt.
The company generated $222 million of FCF (FCF: cash flow from operations less capital
expenditures and dividends) for the LTM period ending June 30, 2014, compared with $497
million during 2013 and $65 million during 2012. The 2012 FCF was reduced by a $275 million
final installment payment to settle a Brazilian collection dispute. Fitch expects WHR will
generate between $400 million and $500 million of FCF during 2014.
Regulatory Issues
There are ongoing regulatory issues that could negatively affect the company’s financial profile.
WHR’s Brazilian operations have received governmental assessments from Brazil related to
claims for income and social contribution taxes associated with the Brazilian government’s
export incentive program (BEFIEX) credits monetized by WHR from 2000 to 2002 and 2007
through 2011. The total outstanding tax assessment for income and social contribution taxes
related to the BEFIEX credits, including interest and penalties, is approximately 1.2 billion
Brazilian reais (equivalent to roughly $573 million as of June 30, 2014). The company is
disputing these tax matters in various courts and has not accrued any amounts relating to
these assessments.
There are also antitrust investigations relating to WHR’s compressor business. Government
authorities in Brazil, Europe, the United States and other jurisdictions have entered into
agreements with the company and concluded their investigations. In connection with these
agreements, the company has incurred cumulative charges of approximately $414 million since
2009, of which $45 million remains accrued. The company has $42 million of installment
payments (plus interest) remaining to be made to government authorities at various times
through 2015. WHR is also continuing to work toward a resolution of ongoing government
investigations in other jurisdictions. Management indicated that it cannot reasonably estimate
the amount it may incur and has not accrued charges relating to these ongoing investigations.
October 10, 2014
71
Corporates
Financial Summary — Whirlpool Corporation
($ Mil., Years Ended Dec. 31)
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Long-Term Secured Debt/FFO (x)
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Cash Flow
Common Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
2010
2011
2012
2013
LTM Ended
6/30/14
1,637
8.9
17.7
1.9
1,486
8.0
7.4
(1.2)
1,657
9.1
9.3
0.4
1,985
10.6
15.8
2.6
1,971
10.5
16.2
1.2
6.1
7.3
3.6
1.1
1.8
2.1
7.0
1.6
0.0
0.9
3.1
8.3
2.0
0.4
1.5
7.4
11.2
3.9
0.8
2.2
8.5
11.5
4.3
0.8
1.6
—
—
1.5
2.9
2.5
7.7
—
—
1.7
7.0
2.8
(4.8)
—
—
1.5
5.6
2.5
1.4
—
—
1.2
3.1
2.1
10.6
—
—
1.4
3.0
2.3
4.5
314
—
2,195
—
—
—
2,509
2,098
4,607
362
—
2,129
—
—
—
2,491
2,211
4,702
517
—
1,944
—
—
—
2,461
2,281
4,742
617
—
1,846.0
—
—
—
2,463
2,221
4,684
315
—
2,461
—
—
—
2,776
2,149
4,925
1,145
(67.0)
1,078
0
(593)
(132)
353
(10)
(397)
72
(30)
(12)
1,368
—
237
293
530
0
(608)
(148)
(226)
23
(15)
14
(55)
(259)
1,109
—
416
280
696
0
(476)
(155)
65
10
(33)
43
(26)
59
1,168
—
1,138
124
1,262
0
(578)
(187)
497
6
10
(255)
(46)
212
1,380
—
1,143
(53)
1,090
0
(663)
(205)
222
14
323
(260)
(24)
275
945
—
18,366
7.4
1,082
225
18,666
1.6
928
213
18,143
(2.8)
1,106
199
18,769
3.5
1,445
177
18,881
2.9
1,425
171
October 10, 2014
72
Corporates
The Home Depot Inc. (Analyst: Phil Zahn)
The Home Depot Inc. (NYSE: HD) is the world’s largest home improvement retailer based on
sales. As of Aug. 3, 2014, the company operated 2,264 stores located in the U.S., Canada and
Mexico. Approximately 11% of revenues are derived from outside the U.S. Home Depot’s
stores, which average about 104,000 sf plus an additional 24,000-sf outside garden center.
Approximately 90% of the store footprint is owned.
Home Depot has generated positive operating momentum since 2010 in the midst of a home
improvement industry that has seen consumers focus on repair and maintenance projects
while increasingly tackling bigger-ticket discretionary purchases. A continued housing recovery
should support further growth in sales of big-ticket items, driving healthy comparable store
sales.
The data breach reported in September 2014 could affect sales growth over the near-term, and
will result in cash costs for fraud reimbursement, card reissuance costs and litigation. However,
Fitch expects these costs will be manageable in the context of the company’s healthy ongoing
cash flow. Fitch believes Home Depot will continue to generate healthy top-line growth and
modest margin expansion in the next 12–24 months.
Operating Results
Home Depot’s comparable store sales have been positive since 2010, following four years of
negative comps. Comparable store sales grew 6.8% in 2013 and 4.3% in the first half of 2014.
Fitch expects comp sales to grow in the positive low to mid-single digits in the next two years.
Home Depot produced a strong margin recovery, with EBIT margins improving to 12.6% in the
LTM ending Aug. 3, 2014, from 10.9% in 2012, and 9.9% in 2011, as strong sales growth
enabled the company to leverage its fixed expenses. Fitch sees moderate additional margin
upside made possible by the investments Home Depot made in its technology and supply
chain.
Home Depot plans to build only six new stores in 2014 — five in Mexico and one in Canada.
Low levels of capex resulted in strong FCF, which is expected to track around $4 billion
annually going forward, as capex remains at less than 2% of sales.
Leverage
FCF, and some incremental borrowings, will be directed to share repurchases, as the company
manages its financial leverage (adjusted debt/EBITDAR) at or under 2.0x. Financial leverage
(adjusted debt/EBITDAR) was 1.9x as of August 2014.
Liquidity
Home Depot had a solid liquidity position supported by a seasonally strong cash balance of
$4.2 billion as of Aug. 3, 2014, together with an undrawn $2 billion credit facility. The next
major debt maturity is a $3 billion note due March 2016, which Fitch expects to be refinanced.
October 10, 2014
73
Corporates
Financial Summary — Home Depot Inc. (The)
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Cash Flow
Common Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
1/30/11
1/29/12
2/3/13
1/31/14
LTM Ended
8/3/14
7,771
11.4
18.0
2.8
8,616
12.2
20.9
5.4
9,813
13.1
23.3
5.2
11,296
14.3
26.4
5.1
11,931
14.8
27.6
5.4
10.7
14.6
4.8
1.6
4.2
11.1
14.1
5.3
6.9
5.4
11.7
15.5
5.6
2.3
5.3
11.5
15.9
5.6
6.3
5.5
11.5
15.5
5.8
6.4
5.8
—
—
1.2
2.6
2.0
11.1
—
—
1.3
2.4
1.9
20.7
—
—
1.1
2.1
1.7
22.3
—
—
1.3
2.4
1.8
18.2
—
—
1.4
2.5
1.9
18.3
1,042
—
8,707
—
—
—
9,749
7,568
17,317
30
—
10,758
—
—
—
10,788
7,584
18,372
1,321
—
9,475
—
—
—
10,796
6,792
17,588
33
—
14,686
—
5
—
14,724
7,240
21,964
34
—
16,697
—
5
—
16,736
7,242
23,978
5,175
(590)
4,585
—
(1,096)
(1,569)
1,920
84
(31)
(2,504)
(345)
(876)
545
—
6,143
508
6,651
—
(1,221)
(1,632)
3,798
92
966
(3,164)
(250)
1,442
1,987
—
6,770
205
6,975
—
(1,312)
(1,743)
3,920
(120)
(32)
(3,200)
(61)
507
2,494
—
7,493
135
7,628
—
(1,389)
(2,243)
3,996
(118)
3,933
(8,305)
(71)
(565)
1,929
—
8,228
(33)
8,195
—
(1,421)
(2,385)
4,389
(105)
3,916
(7,461)
58
797
4,216
—
67,997
2.8
6,053
533
70,395
3.5
6,934
609
74,754
6.2
8,129
632
78,812
5.4
9,539
711
80,664
3.4
10,155
772
October 10, 2014
74
Corporates
Lowe’s Companies Inc. (Analyst: Phil Zahn)
Lowe’s Companies (NYSE: LOW) is the second-largest home improvement retailer based on
sales. As of Aug. 1, 2014, the company operated more than 1,853 home improvement and
hardware stores in the U.S., Canada and Mexico. Lowe’s home improvement stores average
about 113,000 sf of selling space. Kitchens and appliances are the largest single product
category, representing 14% of 2013 sales.
In August 2013, Lowe’s acquired most of the assets of Orchard Supply Hardware for
$205 million plus the assumption of payables. This acquisition expands Lowe’s presence in
California, complementing its existing 110 stores with 72 smaller-format stores averaging
36,000 sf. Orchard will continue to operate as a separate business.
Lowe’s expects to open only 10 home improvement stores and five hardware stores in 2014,
resulting in square footage growth of less than 1%. About 89% of Lowe’s store base is owned.
Operating Results
Lowe’s comparable store sales grew 4.8% in 2013 and 2.8% in the first half of 2014, following
a three-year period of flat to slightly positive comps. Comp sales are expected to track in the
low to mid-single digit range going forward, supported by a continued housing recovery.
The EBIT margin expanded by 60 basis points to 9.6% in the first half of 2014, and
management is targeting a 65-basis-point increase for the year. Margins, while having
improved from the 2009 cyclical low of 6.8%, remain well below the 2006 peak of 11% due to
deleveraging of selling, general and administrative expenses from negative comp store sales in
2007–2009. Fitch sees additional upside to Lowe’s operating margins, which currently lag
those of Home Depot by around 400 basis points.
Leverage
As of Aug. 1, 2014, Lowe’s leverage, defined as adjusted debt/EBITDAR, was 2.1x, and pro
forma for the issuance $1.25 billion of senior notes in September 2014, leverage was to 2.2x as
the company manages leverage to its target of 2.25x.
Slower store growth will benefit Lowe’s FCF after dividends, which is expected to track in
excess of $2 billion in 2014. Virtually all of this and incremental borrowings are expected to be
directed toward share repurchases estimated at $3.4 billion in 2014.
Liquidity
Lowe’s had solid liquidity as of Aug. 1, 2014, with $1.1 billion of cash and short-term
investments, and a $1.75 billion revolver expiring August 2019. The debt maturity schedule is
manageable, with the nearest maturity being $500 million of notes due October 2015. Fitch
expects these notes will be refinanced.
October 10, 2014
75
Corporates
Financial Summary — Lowe’s Companies Inc.
Profitability
Operating EBITDA
FCF Margin (%)
Coverages (x)
Leverage (x)
Balance Sheet
Short-Term Debt
Other Debt
Equity Credit
Cash Flow
Common Dividends
FCF
Net Debt Proceeds
Net Equity Proceeds
Income Statement
Revenue
Revenue Growth (%)
Operating EBIT
1/28/11
2/3/12
2/1/13
1/31/14
LTM Ended
8/1/14
5,359
11.0
16.5
4.0
5,486
10.9
18.9
3.7
5,315
10.5
17.4
3.7
5,850
11.0
19.9
4.6
6,152
11.3
21.0
5.5
11.8
15.0
6.1
5.9
2.9
12.2
14.0
6.5
2.3
2.4
9.5
12.2
5.4
4.7
3.1
9.7
12.1
5.7
3.2
4.4
9.4
12.1
5.6
6.2
4.9
—
—
1.2
2.1
1.7
19.9
—
—
1.4
2.1
1.8
17.2
—
—
1.7
2.7
2.2
15.0
—
—
1.8
2.7
2.2
17.6
—
—
1.6
2.6
2.1
22.1
36
17
6,520
—
—
—
6,573
3,216
9,789
592
20
7,015
—
—
—
7,627
3,280
10,907
47
—
9,030
—
—
—
9,077
3,272
12,349
435
—
10,086
—
—
—
10,521
3,368
13,889
54
—
10,063
—
—
—
10,117
3,368
13,485
3,856
(4)
3,852
—
(1,329)
(571)
1,952
25
1,433
(2,514)
(876)
20
652
471
4,387
(38)
4,349
—
(1,829)
(647)
1,873
52
956
(2,837)
318
362
1,014
286
3,703
59
3,762
—
(1,211)
(704)
1,847
130
1,393
(4,044)
201
(473)
541
125
4,216
(105)
4,111
—
(940)
(733)
2,438
(128)
1,324
(3,545)
(239)
(150)
391
185
4,277
401
4,678
—
(948)
(750)
2,980
(151)
935
(3,601)
(209)
(46)
1,039
90
48,815
3.4
3,675
358
50,208
2.8
3,907
393
50,521
0.6
3,692
436
53,417
5.7
4,288
484
54,620
5.2
4,559
509
October 10, 2014
76
Corporates
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October 10, 2014
77

Corporates

Transcription

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