BofA Merrill Lynch Global Research Report Says Remodeling Activity Signals Upturn in the Home Improvement Industry

Analysts Identify Sectors That Will Benefit From the Home Renovation Cycle

NEW YORK--()--As homeowners take on long-delayed remodeling projects and real estate investors fix up distressed properties, the home improvement sector is getting its own makeover, according to a new BofA Merrill Lynch Global Research report.

“Spending on home improvement is a powerful economic force that will provide a tail wind to the remodeling and construction industry for years to come,” said Denise Chai, retail analyst at BofA Merrill Lynch Global Research and a co-author of the report. “As small-scale renovations give way to bigger ticket home remodeling projects and properties turn over to new owners, a wide range of companies and sectors stand to benefit.”

The report – by the BofA Merrill Lynch Global Research Hardline Retail teams - leverages the views of BofA Merrill Lynch’s Global Research Economics team to identify the reasons behind the increase in renovation spending. The report examines the latest trend in renovation activity based on construction expenditures, building material sales and remodeling hiring. It also looks at the foreclosure pipeline and demand from investors for distressed supply, concluding that the rally in remodeling activity is likely to persist.

The analysts identified four sectors for investors to focus on: home improvement, home furnishings, building materials and appliance makers.

“While the home remodeling market is often overlooked, it is helping to lead the broader housing recovery,” said Michelle Meyer, senior U.S. economist at BofA Merrill Lynch Global Research, who provided economic insights as co-author of the report. “There are some near-term macro headwinds, but also strong underlying trends that will sustain spending for years to come, creating a long-term investment cycle.”

Small-ticket remodeling pickup helping to lift near-term investment

Historically, renovation spending has made up about 25 percent of total construction expenditures and now accounts for about half of the market.1 Less volatile than new construction spending, renovation expenditures also are harder to track. Since many projects are undertaken by do-it-yourself (DIY) homeowners, BofA Merrill Lynch Global Research believes that it is important to study retail sales data and industry surveys to gauge activity missed by government sources.

In the near term, demand for distressed housing inventory remains strong. Industry surveys show that more than one-third of distressed properties sold in 2012 went to investors, who make home improvements to re-sell or rent a property.2 Although homeowners still struggle with debt and restricted access to credit, many have begun to undertake small-scale renovations that were delayed during the recession.

Retail sales of building materials surged over the winter, up 5.9 percent from November to March.3 Private Fixed Residential Investment, which includes major repairs such as bathroom remodeling and window replacement, grew by 11.2 percent in the second quarter. The figure is highly correlated to comparable-store sales figures for U.S. home improvement retailers. It increased from a 9.9 percent gain in the first quarter, producing the fourth consecutive quarter of year-over-year growth.4

Reinforcing trends that will sustain a long-term renovation cycle

BofA Merrill Lynch Global Research expects this surge in home remodeling activity to be aided by a healing economy, eventually fueling a recovery in household formation and housing turnover.

While nearly one in seven adults between the ages of 25 and 34 still lives at home with their parents due in part to high jobless rates, BofA Merrill Lynch Global Research analysts forecast that higher employment rates for young adults will help spur new household formation over the next several years. Once the economy has healed sufficiently and home prices start to recover, many existing households will transition from starter homes to larger properties.

Investment ideas in home improvement

Investors should take a long-term view and a broad perspective in selecting stocks as part of the renovation cycle. BofA Merrill Lynch Global Research believes that home improvement retailers could offer some of the best opportunities to take advantage of the near-term surge in smaller-scale remodeling projects. Investors should look for retailers that could see higher valuations and multiple expansion as the housing recovery takes hold. These include companies with the potential for earnings growth, accelerating same-store sales and growing market share.

The BofA Merrill Lynch Global Research analysts also believe that over the long term, growing demand for energy-efficient products, which typically cost more up front but save the user money over time, will be another source of revenue growth for home centers that retail these products.

1. BofA Merrill Lynch Global Research, U.S. Bureau of Economic Analysis

2. Campbell Survey, Inside Mortgage Finance, BofA Merrill Lynch Global Research

3. Census Bureau, BofA Merrill Lynch Global Research

4. U.S Bureau of Economic Analysis

BofA Merrill Lynch Global Research

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Additionally, BofA Merrill Lynch Global Research was named the No. 1 Global Broker by Financial Times/StarMine, as well as ranking No. 1 in the U.S. and Europe and No. 2 in Asia. The group was also named No. 1 in Asia and No. 2 in the U.S. in the Wall Street Journal Best on the Street 2012 Analysts Surveys. The group was also the winner of the Emerging Markets magazine’s EM Research Global Award for 2010 and 2011.

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Reporters May Contact:
Michelle Falkenstein, Bank of America, 1.646.855.2315