Investors who are reading in the news every day about how house prices are going up in Sydney and Melbourne should consider following the companies that supply building materials and fixtures.
Housing demand will push more new home sales up because established neighbourhoods are usually more expensive to buy into. In addition, unit sales in and near CBD areas are actually rising faster than houses.
Here are four companies that provide the materials and items to finish off new dwellings.
Hills Holdings (ASX: HIL) manufactures construction materials, as well as electronics and communications products. The share price has already risen up from $1 to $1.77 since late June, when it began to sell off assets and businesses that were not considered core business anymore, and have made the company a much leaner competitor.
It plans to expand more into electronics and communications goods that have higher profit margins, and has set its goal on improving earnings. The market welcomed that move, which coincided well with the housing market recovery.
Plumbing and bathroom products supplier Reece Australia (ASX: REH) is a $3 billion business by market capitalisation, and reported its highest ever net profit after tax (NPAT) of $119 million in 2013. It controls 20% of the wholesale plumbing goods market, way ahead of the 6% market share Fletcher Building (ASX: FBU) has.
It has just hit a share price all-time high of $32, and has a price-earnings ratio of 25, so the market is pricing in strong growth over the near term.
Fletcher Building, which provides building materials and products and is valued at $5.7 billion by market capitalisation, has risen in share price about 45% over the past year.
Revenue growth has been in line with its peers, and its sheer size in the market means it will be supplying a lot of materials in general for the housing market.
GWA Group (ASX: GWA) supplies building fixtures and fittings covering bathrooms, kitchens, heating/cooling, and access systems. Over the past two years it has seen a downturn in NPAT from $63 million to $38.6 million, yet its share price has doubled from about $1.60 in Nov 2012 to $3.18 currently.
Foolish takeaway
Housing-related stocks are cyclical in nature, so to get the maximum return possible, it is better to start early on in the cyclical upturn. When new building approvals statistics started to trend upwards in September and October 2012, these companies started their rise.
Typical cycles might last five to seven years, so we are still early in that period. Take a look at these stocks and do your research well, noting which have had stronger growth rates in the near past.
