One of the biggest stories in the stock market over the past year is the rapid rise of interest rates. After more than a decade of interest rates that were near zero, the incremental rate hikes seen throughout 2022 have started to impact some critical sectors of the economy.
The rise of interest rates is particularly important to the housing market. Gone are the days of sub-3% mortgages. In fact, the average mortgage rate for a 30-year fixed-rate mortgage is now north of 6%. This likely means that fewer people will move or purchase new houses now that doing so will cost significantly more. However, for companies that cater to homeowners looking to improve their existing homes, this new rate environment could end up being a benefit.
Here's a look at three of them.
1. Home Depot
Home improvement giant Home Depot(NYSE: HD) needs no introduction, as its more than 2,000 stores are likely within a short drive of nearly anywhere in the country. While many consumers know Home Depot as the go-to location for all things home improvement, it also has a large business that caters to professionals hired for home improvement projects.
Home Depot is seeing strong performance from its Pro segment. In Q4 2022, Pro sales growth outpaced the do-it-yourself (DIY) segment, and backlogs for the Pro segment remained higher than their historical average. This performance was led by categories one might expect to see in a typical home renovation project like building materials, plumbing, and bath-related items.
Overall, Home Depot had a strong 2022. Revenue increased by 4% and comparable sales grew by about 3%. The company also announced a 10% increase to its dividend, which now yields 2.7%. It has also repurchased more than 1 billion of its shares over the last 10 years, reducing its shares outstanding by more than 30%.
2. Target
While rising interest rates may lead to more home improvement projects, some homeowners who opt to stay in their current homes may just want to spruce things up without the hassle and expense of a large project. Target(NYSE: TGT) is perfectly suited for this scenario. With a large selection of home decor items, as well as consumer staples like food and clothing, Target has seen steady traffic and sales for many years.
In Q4 of 2022, Target had comparable sales growth of 0.7% which was driven entirely by increased guest traffic. That's not the most impressive number, but it's on top of an astounding 8.9% increase in Q4 of 2021, so it was a difficult comparison to beat.
Target has invested heavily in its same-day services over the past several years, and those investments are paying off. Providing shoppers with options like in-store pickup, drive-up pickup, and same-day delivery was well received. In Q4, these same-day services grew 4.3% and represent more than 10% of total sales.
Target has also been very good to its shareholders. It has raised its dividend for 51 consecutive years, and its share repurchases reduced shares outstanding by 28% over the past 10 years.
3. Trex
Operating in more of a niche within the home improvement space, Trex(NYSE: TREX) produces composite decking material that has become a very popular alternative to wood. In fact, Trex has reached "verb status" for many who refer to any non-wood deck as a "Trex deck".
Trex also appeals to consumers interested in environmental issues. Trex decking is comprised of a blend of scrap wood fibers and recycled polyethylene film. Trex can use these scrap products that would otherwise be filling landfills to create beautiful decking.
Despite the potential tailwind of more homeowners opting for improvement projects over moving, Trex products are more expensive than wood, so there's a potential that a slowing economy presents a challenge for the company. However, management spent the past year rightsizing its inventory and expenses and began to see results in Q4 2022 as its gross margin improved to 34.1%, up from 38.9% in the year-ago quarter.
2023 could be a challenging year for the company, but there's reason to buy now for the long term. Trex is still the leader in non-wood decking, and much like Home Depot and Target, it also reduced its shares outstanding by more than 20% over the past 10 years. Trex has been a long-term market-beating investment, and is positioned to remain one over time.
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Jeff Santoro has positions in Target. The Motley Fool has positions in and recommends Home Depot, Target, and Trex. The Motley Fool has a disclosure policy.
