Zacks Bull and Bear of the Day Highlights: Estee Lauder Companies, Universal Forest Products, D.R. Horton, International Paper and Masco

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Feb 23, 2011, 09:30 ET

CHICAGO, Feb. 23, 2011 /PRNewswire/ -- Zacks Equity Research highlights: Estee Lauder Companies (NYSE: EL) as the Bull of the Day and Universal Forest Products Inc. (Nasdaq: UFPI) as the Bear of the Day. In addition, Zacks Equity Research provides analysis D.R. Horton (NYSE: DHI), International Paper (NYSE: IP) and Masco (NYSE: MAS).

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Full analysis of all these stocks is available at http://at.zacks.com/?id=2678.

Here is a synopsis of all five stocks:

Bull of the Day:

Estee Lauder Companies (NYSE: EL) is one of the leading players in the global cosmetics space and commands a strong portfolio of well-established brands. The company is currently undertaking initiatives to reduce overheads and optimize inventory levels, which augur well for future operating performance.

Furthermore, Estee Lauder has a consistent track record of returning cash to shareholders in the form regular dividend payments. Additionally, the company reported a robust second quarter 2011, with earnings up 38% year-over-year.

Quarterly earnings also outpaced the Zacks Consensus Estimate by 23%. We are currently upgrading our recommendation on Estee Lauder from Neutral to Outperform. The shares have a Zacks #1 Rank (Strong Buy).

Bear of the Day:

Universal Forest Products Inc. (Nasdaq: UFPI) reported quite disappointing results in fourth quarter 2010 with EPS falling 14 cents below the Zacks Consensus. The company's healthy top-line growth was offset by higher cost of sales due to volatile lumber prices in the quarter.

In addition, Universal's precarious dependence on general market conditions and growth in end-markets increases top-line risks in the event of any adverse conditions. Also, significant volatility in the cost of commodity lumber products from primary producers is problematic.

The company also derives a large portion of its sales from one single customer, which exposes it to customer concentration risks. In anticipation of a lack of positive catalysts, we downgrade the stock to an Underperform recommendation.

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Case-Schiller: Home Prices Fall Again

The homebuyer tax credit was propping up home prices, but now with that support gone, prices are resuming their downtrend. People had until June 30 to close on their houses, and they had to agree to the transaction by April 30. That pulled sales into those months that might otherwise have happened later on. The credit was up to $8,000, so almost nobody would want to close their deal in early July and simply leave that money on the table.

The tax credit is a textbook example of a third party subsidizing a transaction. When that happens, both the buyer and the seller will get some of the benefit. The buyer gets his when he files his tax return next year; the seller gets hers in the form of a higher price for the house.

Since the tax credit is now over, that artificial prop to housing prices has been taken away. Sales of existing houses simply collapsed in July, after the credit expired, and have remained depressed ever since. The extremely high ratio of homes for sale to the current selling pace is sure to put significant downward pressure on prices.

There is still quite a bit of "shadow inventory" out there as well. That is, homes where the owner is extremely delinquent in his mortgage payments and unlikely ever to make up the difference, but that the bank has not yet foreclosed on or foreclosed houses that have not yet been listed for sale.

A normal market has about six months of supply available; during the bubble, the months of supply generally ran closer to four months, and prices were soaring. It was not until inventories climbed above the six month mark that prices started to fall. The really collapsed as the months of supply moved into the double digits.

The extensive government support for the housing market -- including the tax credit, but also the Fed buying up $1.25 Trillion in mortgage paper to artificially depress mortgage rates -- helped boost sales and bring the months of supply back down. Now that support is over, the months of supply are still elevated, and thus housing prices are falling. Unfortunately this graph is not updated with the December price data, and we will not get the months of supply data for existing homes until tomorrow.

The tax credit was not a very effective means of stimulus, but it did help prop up prices, and that is a pretty important accomplishment, even if it proves to be ephemeral. The credit cost the government about $30 billion. A large part of that money went to people who would have bought anyways, but perhaps would have done so in July or August rather than May or June.

New Homes = Big Stimulus

To the extent it rewarded people for doing what they would have done anyway, it did nothing to stimulate the economy. Also, turnover of existing houses really does not do a lot to improve the economy. It is the building of new houses that generates economic activity.

It is not just about the profits of D.R. Horton (NYSE: DHI). A used house being sold does not generate more sales of lumber by International Paper (NYSE: IP) or any of the building products produced by Masco (NYSE: MAS). It does not put carpenters and roofers to work. New homes do.

While housing prices are important to the economy, the level of turnover in used houses is not. Home equity is, or at least was, the most important store of wealth for the vast majority of families.

Get the full analysis of all these stocks by going to http://at.zacks.com/?id=2649.

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