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Stock Valuations May Rise for Housing Despite Euro Crisis: Report

Despite the deteriorating situation in Europe, the United States housing market's recent gains should drive up stocks valuations for building products companies in the near future, ""Barclays"":http://group.barclays.com/home said in a report Tuesday.


Barclays' U.S. Building Products & Homebuilding report shows that valuations for building products stocks under the institution's coverage are in the lower half of their historical trading ranges, largely due to ""fairly lackluster"" first-quarter earnings caused by lag between home purchases and building products sales.

Financial crises in the euro zone are also driving down building products stocks for companies with European exposure.

While these issues have prompted Barclays to lower some of its estimates for fiscal years 2012 and 2013, Barclays analyst Stephen Kim said that the Europe-related pullback may present opportunities for investors in building products stocks.

├â┬ó├óÔÇÜ┬¼├àÔÇ£We acknowledge that the ongoing difficulties in the Eurozone will likely pressure 2Q12 earnings for many of the companies; accordingly, we are revising down estimates to reflect our new base case of European sales down 10 percent in FY12.

""However, we also believe that investors should take note of the potential for any European-related weakness to be outweighed by growing sales to the strengthening U.S. residential market,├â┬ó├óÔÇÜ┬¼├é┬Ø Kim wrote in the report.

The report goes on to speculate that the housing market in the United States will still be ├â┬ó├óÔÇÜ┬¼├àÔÇ£in the early stages of a cyclical recovery├â┬ó├óÔÇÜ┬¼├é┬Ø in June 2013 and that the commercial market's 18-month lag to the residential market will be ├â┬ó├óÔÇÜ┬¼├àÔÇ£signaling an imminent turn.├â┬ó├óÔÇÜ┬¼├é┬Ø

Barclays believes that valuations at that time will be up at the higher end of the group├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós historical


ranges, explaining the institution├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós price target for each stock.

While Barclays believes current conditions create opportunities in both homebuilders and building products stocks, it favors products companies for their strong brands, positive cash flow, and dominant market shares.

The company named Mohawk Industries Inc. as its top pick, citing ├â┬ó├óÔÇÜ┬¼├àÔÇ£an attractive mix of European and U.S. housing exposures, a surprisingly strong and entrepreneurial base of operations in Europe, and a forthcoming boost to its European margins from reduced amortization expense that we do not believe the market expects.├â┬ó├óÔÇÜ┬¼├é┬Ø

A visit to Mohawk├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós Unilin operation in Belgium (the division ├â┬ó├óÔÇÜ┬¼├àÔÇ£least well understood├â┬ó├óÔÇÜ┬¼├é┬Ø by investors, the report says) bolstered Barclay├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós optimism in Mohawk├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós European operations. In addition, a modest sales exposure to Europe combined with significant exposure to the United States gave the financial institution reason to pick Mohawk as a good buying opportunity.

Barclays also expressed high hopes for Owens Corning Inc., owing largely to the institution├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós expectations of strong performance in roofing and insulation sales.

As far as the building products market as a whole goes, Barclays believes that market recovery of new residential construction and residential remodeling will be linked. The recent rise in home prices is expected to drive up demand for products as homeowners start taking up large-scale remodeling projects.

Moreover, statistics show that more than half of the two million homes that are in some stage of foreclosure have not had a mortgage payment made on them in more than two years. Any of these homes that have fallen into dilapidation will require either demolition or rehabilitation.

The institution updated its estimated earnings per share (EPS) for several companies:

├â┬ó├óÔÇÜ┬¼├é┬ó Armstrong World Industries├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ó estimated EPS fell to $2.59 for FY 2012 (from $2.70) and $3.25 for FY 2013 (from $3.27).
├â┬ó├óÔÇÜ┬¼├é┬ó Interface Inc.├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós estimated EPS fell to $0.69 for FY 2012 (from $0.72) and $0.93 for FY 2013 (from $0.94).
├â┬ó├óÔÇÜ┬¼├é┬ó Owens Corning Inc.├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós estimated EPS fell to $1.88 for FY 2012 (from $2.02) and $3.03 in FY 2013 (from $3.16).
├â┬ó├óÔÇÜ┬¼├é┬ó Stanley Black & Decker├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós estimated EPS for FY 2012 fell to $5.55 for FY 2012 (from $5.71) and $6.33 for FY 2013 (from $6.42).

In addition, Barclays changed its price targets for Armstrong World Industries (up from $52 to $55) and Stanley Black & Decker (down from $100 to $98).


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