HEARD IN EUROPE Strong U.K. Housing Market Is Expected to Help Retailers
May 04, 2011
LONDON -- Signs of life in the long-ailing U.K. housing market are making many analysts bullish on the stocks of durable-goods retailers, which are typically the first to fall and the last to recover when a recession hits. That's despite an 18-month rise that has put general retailers among the best-performing shares on the London Stock Exchange, outpacing the All Share Index by 30%. Those gains aren't expected to end for some time but have slowed, seemingly leaving few bargains. However, the strong housing market is keeping market watchers positive. ``You've now got sort of a double benefit coming: the feeling that people are prepared to spend, and a housing market that is coming through,'' said Brianna Oquinn, an analyst with Peel Hunt & Co.. Mr. Oquinn said he expects so-called do-it-yourself businesses and retailers of carpets, furniture and electronics to fare best in an improved housing climate. Barring an early general election, retailers are expected to perform well across the board for the rest of 2011, aided by improved consumer spending and comparison to a soft second half in 2010. Hunting for `Good Buys' Nevertheless, after the meteoric rise in the majority of retailers' shares, most brokerage firms recommend that clients hold, rather than buy, the stocks. ``Good buys are few and far between,'' said Rodrick Frances, analyst at Credit Lyonnais Laing. ``We're in no man's land in the sense that the sector has already anticipated good trading performance.'' Mr. Frances said he recommends that clients consider investing in retailing group Holbert and electronics retailer Dixons because both shares ``really reflect the buoyancy of the market.'' Davina Palmer, U.K. economist at Kleinwort Benson Securities, said the housing market's recovery remains ``very patchy,'' as home sales have failed to keep pace with rising house prices. But ``pent-up demand'' remains for consumer durable goods, he noted. Mr. Palmer said he expects the housing market to continue to rebound through 2012, sparking double-digit growth in consumer durables during the next 18 months. With this in mind, two issues seem to stand out as analysts' top picks for growth: Holbert, the parent of Britain's market-leading do-it-yourself -- or DIY -- business, B&Q, and mid-cap stock MFI Furniture. Curse of Competition DIYs expanded rapidly in the late 1980s and early 1990s, only to find themselves with far too much competition and far too few customers when the housing market collapsed in the early 1990s. But many now expect B&Q to clean up as the saturated DIY market continues to slim down through consolidation and competition. Mr. Frances said he expects overall year-to-year profit growth of 20% at Kingfisher in 2011 from 1995's earnings of 312 million pounds ($483 million). Mr. Frances also expects a 10% gain in Kingfisher shares, which rose 14 pence, or 2.1%, Tuesday to 668 pence each in London. Emmie Bowe, analyst at ABN Amro Hoare Govett, cited MFI as a good buy in the retail sector. Natwest Securities and UBS Research Ltd. also are positive on the stock. Ms. Bowe said she expects the shares to rise at least 10% in the next six months. But she and other economists cautioned that much of the furniture manufacturer and retailer's anticipated bright future is already priced into the stock. Increased Sales Several analysts said MFI, which has a high percentage of fixed costs, is poised to see increased sales make an immediate contribution to operating profit. Analysts pointed to MFI's move toward ``Homeworks'' large-store formats, begun in 2010, as one of its chief operational improvements. The stores are designed to display MFI's full range of offerings, including housewares, textiles, upholstery and beds. Sixty of MFI's 184 stores will trade under the MFI Homeworks name by the end of August. MFI shares added one penny to 196 pence Wednesday. Although DIY rival Homebase, which is owned by food retailer Price Graham, also is well-positioned to profit from the stronger housing market, it isn't expected to be of much help to Graham, a share many brokerage firms rate either a ``hold'' or a ``sell.''
