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Yes, These Companies' Numbers Look Bad. But Odds Are Most Will Start Getting Better

It takes both perspective and faith to review these latest earnings reports for construction supply dealers and manufacturers and remain smiling. The latest revenue and profit numbers sure look awful when compared with the sky-high revenues that dealers took in during 2021 and 2022. And when you consider past forecasts of a widespread recession and a slump in housing starts, you also could have predicted equally painful times to come. But now, prospects are growing that future reports won't look anywhere near this bad.

For one thing, check out this chart. It shows the federal Producer Price Index's average price for softwood lumber in 2022 vs. 2023. The chart tells how much of a hit dealers' revenues took in the first quarter because of a 46.3% drop in prices and in the second quarter because of a 34.4% decline year over year. For this quarter, if prices stabilize or even go up--as is common with fall buys--the decline in average price will be half to two-thirds less painful in the third quarter than in previous periods.

And that's not all...

* Stock analysts didn't express surprise at any of the public companies' earnings reports. Even if numbers went down, some firms (such as Masco) raised their earnings expectations. Fortune Brands' new guidance is slightly less negative than before.

* The U.S. Remodeler Index, created by John Burns Research and Consulting (JBREC) and the publication Qualified Remodeler, had been predicting that full-service remodelers would see a 3% revenue decline in 2023. Now it's forecasting a 0.5% increase. But design-build firms' annual revenue growth forecast dropped to 3% this quarter from 4% in the first quarter.

* GMS likes how busy multifamily builders are these days. As for single-family, GMS predicts near-term declines year over year, but adds: "... our current run rates and comments from some large builders continued to provide encouraging signs." Through September 2023, it predicts total wallboard volumes to be flat to down low single-digits, but prices to rise in the upper single digits compared with last year's July-to-September quarter.

* The latest Kitchen and Bath Retailers' Index, produced by the National Kitchen & Bath Association with JBREC, found respondents fear of recession has dropped, going from 24% showing concern in the first quarter to 20% rating it a top concern in the second quarter. Participants also were less worried about the cost of materials and cost inflation.

In general, lots of people are relieved by the numbers because they feared they would be worse. Across LBM, dealers who late last year into January were worried about a falloff in business come summer now expect to be busy for the rest of 2023.

Here's a look at some of the publicly traded manufacturers' reports, focusing on the performance of segments within the company that matter most to U.S. dealers:

Sometimes the messages are mixed. Surveys by TD Cowen indicate pro remodelers' backlogs and leads "increased nicely" in the second quarter, albeit with lower project sizes and thus lower overall spend. Similarly, The Farnsworth Group's monthly survey of DIY and DIFM customers found homeowners feeling more comfortable starting a home improvement project under $5,000, but 54% saying it's a bad time for projects over $5,000.

And some news can only be regarded as challenging:

* The Federal Reserve Board reports that bank lending for residential and commercial real estate tightened in the second quarter from the first. Demand for the loans weakened as well.

* Fannie Mae's Home Purchasing Sentiment Index found only 18% of those polled in July think this is a good time to buy a home. That's down four points from June.

* James Hardie predicts its addressable market in North America will shrink by 5% to 18% this year compared with 2022.

* Economists predict a slowdown in consumer spending once repayment of the roughly $1.5 trillion owed on student loans resumes in October.

For all that, companies remain optimistic, if only because America is massively underbuilt. "As we close out the first half of 2023, we are encouraged by the resiliency of market demand despite ongoing economic uncertainties, and our long-term view of the strength of residential construction remains," Boise Cascade CEO Nate Jorgensen said.

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