Should you ignore Home Depot and buy this great home inventory instead?

With interest rates lower, it’s time to consider some housing-related stocks. The housing market is always sensitive to interest rates due to the impact of mortgage rates on home prices and sales. Home Depot (New York Stock Exchange: HD) is a clear choice, an acceptable and worthwhile option when people are spending more on their homes. However, I think the pool products and water solutions company penter (Poland -0.43%) This may be the best buy to introduce you to the topic of the housing market.

Home Depot and housing

Lower interest rates will inevitably improve Home Depot’s prospects. Still, the stock’s valuation (about 28 times Wall Street consensus 2024 earnings estimates) may reflect anticipation of improvement. And, as I previously discussed in article about Home DepotHome Depot customer transaction volume has declined year over year since the second quarter of 2021.

This is a key metric for Home Depot, as price increases may be difficult to implement in a lower inflation environment.

Lower interest rates likely mean new pools will emerge.

While Home Depot is worth keeping a close eye on, Pentair appears to have growth potential in the near, medium and long term, and there are three reasons to consider buying it in that time frame.

In the near future, it is no secret that the slowdown in the housing market has negatively impacted the demand for new swimming pools. Pentair CEO John Stauch told investors in July that “the number of new inground pools built in 2024 is now expected to be about 60,000 pools, up from about 72,000 in 2023 and about 78,000 in 2019.” Other estimates for new pools built in 2024 also fell during the year.

This demonstrates the sensitivity of new pool construction to housing market conditions. If interest rates fall before 2025, it’s reasonable to expect an improvement in the housing market and increased spending on new pool construction.

Pentair’s other two segments (flow and water solutions) are also exposed to the residential market and should get a boost when they do. About 39% of sales (pumps and systems for liquid purification) come from the residential and agricultural sector. Meanwhile, about 33% of water solutions sales (commercial and residential water treatment systems) come from residential solutions. The company’s net sales are split approximately equally between its three segments.

Pool products – a growing market

While an improving housing market will boost Pentair’s sales in the short term, it is important to note that 80% of the pool segment’s sales come from the existing pool market. Additionally, although new pool construction is down in 2024, the number of pools is still increasing, supporting long-term growth opportunities in the pool products market.

Management reports non-discretionary pool costs of approximately $400. Additionally, the increasing adoption of pool automation, as well as new lighting, variable speed pumps and high-efficiency heating solutions, offers long-term potential for sales growth in the existing pool market.

The restructuring will lead to improved profitability.

In addition to short-term and long-term growth catalysts, Pentair management is continuously implementing a number of transformational initiatives aimed at increasing sales margins from 20.8% in 2023 to 24% in 2026.

Stauch believes these initiatives, which include target pricing, supply improvements, lean management practices and investments in automation, are needed to improve the performance of businesses acquired over the past 30 years. These initiatives are based on the implementation of the 80/20 rule or the Pareto principle, according to which 80% of the results are due to 20% of the reasons, in the organization of sales, product range and production.

Promotions to buy

Pentair is not only playing in an improving housing market; it is also a company undergoing transformational initiatives to improve profitability with excellent long-term prospects due to continued growth in its installed pool base and improved water quality. Pentair is trading at 23 times projected earnings in 2024 and has outstanding growth prospects over the next decade. The company trades at a discount to Home Depot and has better growth prospects.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has disclosure policy.