TRG | The Bottom Line – 9/12

The interest rate-driven zeitgeist – If rates come down, a large portion of TRG’s coverage is likely to be positively impacted, with perhaps the biggest boost to the residential end market. The residential market has been challenged the past few years, with R&R being in a multiyear recession. This is driven by a few factors: home price appreciation, product and labor cost inflation, and higher mortgage rates, all of which has made home-buying and R&R more expensive. TRG does not necessarily see much relief in building products or labor costs anytime soon. The reindustrialization of the U.S., AI build out, and broad consolidation of the building product distribution space are all contributors to overall building products & materials and labor inflation. The biggest lever to affordability, in our opinion, is the 30-year fixed mortgage rate, which has dropped to 6.35% versus 6.5% the previous week, according to Freddie Mac. This is the largest drop in at least a year. Mortgage rate relief could spur a rebound in activity, and in anticipation, homebuilders and big box home improvement companies – Home Depot (HD) and Lowe’s (LOW) – have seen their stocks rise over 15% since early August. Other notable resi R&R positive movers include Mohawk Industries (MHK), Masco (MAS), Fortune Brands (FBIN) and Owens Corning (OC). We continue to seek out the companies that have made positive fundamental shifts in their business that will further boost results in a volume rebound (distributor consolidation, secular product share-gainers, etc.), such Builders FirstSource (BLDR) and Louisiana Pacific (LPX). Overall, TRG expects to see continued momentum in resi R&R names in coming weeks and months. The stocks of other R&R beneficiaries, Quanex (NX) and HNI Corp (HNI), have been held down in recent weeks for company-specific reasons that, in our view, are temporary. We believe both stocks would positively participate in an R&R recovery.