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The Ratings Game: Fewer homes are being built, and that could hurt these stocks, JPMorgan says


As the housing market stalls under rising interest rates, demand for a variety of home products is likely to suffer — from dishwashers made by Whirlpool Corp. to roofing materials made by Owens Corning, JPMorgan analysts said on Tuesday.

JPMorgan analysts downgraded Whirlpool

to neutral from their version of buy and cut their rating on Owens Corning

to their version of sell from neutral. Shares of Whirlpool were down 1.3% on Tuesday, while Owens Corning’s stock edged down 0.4%.

“In terms of our fundamental outlook, from an industry standpoint, we note that at recent levels, single-family housing starts and existing home sales could decline 25% and 23% (year-over-year), respectively, over the next six months (i.e., through April 2023), thereby suppressing new residential and repair/remodel demand for building products well into 2H23,” the analysts said.

They continued: “hence, we believe low double-digit and high single-digit declines across new residential and repair/remodel demand, respectively, in 2023 is reasonable.”

They said that the building-products stocks they follow have, on average, underperformed the S&P 500 index

for as long as 18 months after the past several cycles of interest-rate hikes out of the Federal Reserve. By contrast, shares of home builders they cover have outperformed the benchmark index over that time-frame.

For Owens Corning — which along with roofing shingles and laminates makes construction materials like glass fiber and insulation — the analysts cited the company’s “modestly above average exposure to Europe and solid exposure to the U.S. new residential market.” They also said “above average downside risk” exists for the company’s margins, after those margins expanded more than some of their rivals’ over the past three years, helped by gains in its composites and roofing segments.

The analysts also lowered their price target on Owens Corning to $79 from $85.

Whirlpool, the analysts said, faced risks from “a potentially more promotional and competitive backdrop” in North America. They also pointed to what they said was the company’s “elevated leverage” following its purchase last month of InSinkErator, a maker of food waste disposers, from Emerson Electric Co.
The analysts lowered their price target on Whirlpool to $137 from $145.

Whirlpool stock has slid 42% so far this year. Owens Corning is down 3.5% over that time. Year-to-date, the S&P 500 is down around 20%.

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