Mon, 18 Sep 2017
After back-to-back hurricanes, there will be disruptions and opportunities in construction, but we don't expect changes to our fair value estimates.
Jeremy Glaser: In the wake of Hurricanes Harvey and Irma, many are wondering what the impact on the housing market is going to be. We asked Morningstar analysts to give their take, both in the short and long term for the homebuilders and the building materials sector.
Brian Bernard: Let's start with the headwinds. I think the first knee-jerk reaction is how much it's going to cost the homeowners to repair damaged homes. The thing is that the homeowners do actually insure homes that are in progress, so there's not going to be really any kind of financial burden from that. Really, the headwind is going to come from delayed deliveries and sales.
With deliveries, a delay is going to come because they had a home that was ready to be delivered, now they have to make some repairs. That takes longer, labor and there's been a shortage there, and now that the laborers are repairing existing homes, it's going to make it slower, too. On the sales front, if you're looking to sell your home and build a new one and your home is damaged, that's obviously going to delay things. That's really where the headwinds are going to come, just from the delays.
Longer term though, we think there's going to be opportunities, really to the extent of how many homes were completely destroyed. It sounds like Houston has more of a flooding issue, and not going to be much of an impact there. In Florida, probably a bit more demand there from that type of thing. Overall, Lennar just talked about the damage there in the Houston and Florida markets. Houston, really no damage. Florida, they said minor. Again, the big problem is the delays.
We didn't really change any of our fair values for the homebuilders. All of them look fairly valued at this point.
Charles Gross: In the wake of Hurricane Harvey and Hurricane Irma, we see both headwinds and tailwinds for wood products companies over the coming quarters and years. In the near term, we see some volume headwinds in the sense that as homebuilders have been kept off of their job sites, we're going to see less building activity in the southeast United States for the coming quarters.
Offsetting that to some extent is an expectation of higher prices. As inventories grow tight in the southeast U.S., we would see lumber and wood structural panel products inventories grow tight, and that should lead to higher pricing. In the medium term, we see more reason to be optimistic, as lumber and structural panel companies ramp up production over the coming year or two, and we see homebuilders essentially trying to make up for lost time, building more in 2018 than we otherwise would have expected, and that'll lead to higher demand for these products that should lead to higher pricing and volumes.
In addition, you have effects such as destroyed homes. Particularly in the case of Hurricane Irma, we would see destroyed homes as insurers pay out on the west coast of Florida beginning to rebuild those structures and that leads to higher demand as well. Looking back at Hurricane Katrina, for example, New Orleans experienced multiple years of elevated building activity following the hurricane's destructive path.
Overall though, we don't see any fair value changes for our wood product companies Canfor, West Fraser--those produce lumber--or wood structural panel product businesses, Louisiana-Pacific and Norbord.
Kristoffer Inton: For aggregates companies, the hurricanes are likely to impact near-term shipments, but are likely to deliver long-term demand. In the near term, quarries have been flooded and will need to be drained before shipments can resume, likely to weigh on the near-term volumes. But in the long term, damaged roads and nonresidential buildings build more demand in the long run.
Martin Marietta, Vulcan Materials, and Summit Materials all have presence in Texas. Vulcan Materials also has a presence in Florida. Both of these states have strong road funding mechanisms, so they're in a position to pay for any road projects that have resulted from this storm.