The homebuilder confidence index maintained by the National Association of Home Builders and Wells Fargo (WFC, Financial) pulled back slightly in October from the highs established in September.
The October score was 63 which was down from 65 in September but above the August score of 59. The September score had been the highest level achieved in 11 months. Still, October’s score indicates that homebuilders are optimistic. Scores above 50 are generally regarded as positive sentiment. Overall housing starts have increased 6.1% through August from a year earlier, with construction of single-family houses as the primary driver.
If you are optimistic about the housing market then you may want to consider Omega Flex (OFLX, Financial). It may sound like a protein shake, but Omega Flex’s business is to manufacture flexible metal hose also known as corrugated stainless steel tubing (CSST). The company supplies different markets like construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries.
However, Omega Flex has the most success within the residential construction industry. The advantage of flexible metal hose over traditional pipe is that it can bend around objects and corners and is much easier to use. In addition, CSST is desirable for gas piping because it can withstand events like earthquakes or instances of jarring or gradual shifting.
Omega Flex’s product is extremely easy to install. Traditional piping, on the other hand, must be measured and elbow fittings must be applied if a design requires the piping to bend. The labor savings makes the company’s products cost effective. The video demo below shows flexible metal hose being installed with the company's AutoSnap fitting.
AutoSnap Install from Omegaflex Inc. on Vimeo.
Financials
| Revenue ($Mil) | 95.14 |
| Market Cap ($Mil) | 377.33 |
| Revenue Growth Rate 10 Year | 2.50% |
| EPS Growth Rate 10 Year | 7.50% |
| Revenue Growth Rate 1 Year | 4.10% |
| EPS Growth Rate 1 Year | 1.30% |
| ROE | 35.4% |
| ROA | 26.0% |
| ROC | 82.8% |
| ROE (10-year median) | 29.8% |
| ROA (10-year median) | 16.8% |
| ROC (10-year median) | 70.6% |
| Debt/Equity | 0 |
| Current Ratio | 4.3 |
| EV/EBIT | 15.7 |
| P/E | 25.4 |
From the table above, you can see that Omega Flex’s financial metrics are impressive. The 10-year median ROE is 29.8%, ROA is 16.8%Â and ROC is 70.6%. Since 2001, the company has not lost money in any single year.
The long-term trend is upward although the company experienced setbacks in net income during 2009 to 2011 due to the weak housing market. Gross margins for the last 12 months were 61.6% which is up from 57.2% in 2015 and 50% in 2014. The company also has a strong balance sheet with no debt and has a current ratio of 4.3. Omega Flex does not have to maintain high levels of inventory because the product does not require long lead time to manufacture.
Final thoughts
When I read business journals, it’s apparent this country has an affordable housing crisis.
Looking for attractive stocks related to the housing market can be difficult. Homebuilders operate in a tough industry. Challenges include high fixed costs and an uncertain labor supply. Housing is also driven by local dynamics such as regional employment, affordability, local zoning regulations and many other factors.
For example, the permitting process can be extremely time consuming for a homebuilder. Many homebuilders operate in different housing markets. As a result, it can be difficult to forecast sales. One large company closing a plant can have a significant impact to a local economy which in turn affects individual home prices.
Omega Flex, on the other hand, is a simple, easy to understand business that earns high returns on capital. It has been able to maintain its margins because it operates in a small niche market. There are approximately 10 U.S. competitors and another 10 in Europe and Asia. One negative is that the company has customer concentration risk. One customer accounted for approximately 16% of 2015 sales and approximately 25% of accounts receivable.
The stock is too expensive at its current price-earnings (P/E) ratio of 25. However, I like the company because household formation is a long-term opportunity with millennials now comprising the largest segment of the population. Housing starts are still below their historical averages as the chart below shows. Consequently, Omega Flex is on my watchlist. This is a small cap stock with low trading volumes so be sure to use limit orders.
Housing starts historical chart
Disclosure: The author does not own stock in any company mentioned in this article.
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