With interest rates low, it’s time to consider some housing-related stocks. The housing market is always interest rate sensitive due to the impact mortgage rates have on home pricing and sales. Home Depot (NYSE:HD) It’s an obvious choice, an acceptable and valuable option as people spend more money on their homes. Still, I think it is a pool products and water solutions company. pentair (PNR -0.43%) It is arguably a better buy for exposure to housing market contact.

Home Depot and housing

Low interest rates will inevitably boost Home Depot’s prospects. However, the stock’s valuation (about 28 times Wall Street consensus for 2024 earnings) likely reflects the expectation that the recovery is coming. And as I discussed before An article on Home DepotHome Depot’s customer transactions have decreased year-over-year since the second quarter of 2021.

It’s an important indicator to keep an eye on at Home Depot because price increases may be difficult to implement in a lower inflation environment.

Low interest rates likely mean more new pools

While Home Depot is worth watching closely, Pentair looks to have upside potential in the near, medium and long term, and three reasons to buy it can be considered in these time frames.

Starting in the near term, it’s no secret that the slowing housing market has negatively impacted demand for new pools. Pentair CEO John Stauch told investors in July that “new inground pools built in 2024 are now expected to be close to 60,000 pool intervals, compared to approximately 72,000 pool intervals in 2023 and approximately 78,000 pool intervals in 2019.” Other estimates for new pools to be built in 2024 also declined throughout the year.

This situation reveals the sensitivity of new pool constructions to housing market conditions. If interest rates fall by 2025, it would be reasonable to expect an improvement in the housing market and new pool construction spending.

Image source: Getty Images.

Pentair’s other two segments (flow and water solutions) are also exposed to the residential market and should receive a boost in this case. Approximately 39% of flow sales (liquid treatment pumps and systems) go to the residential and agricultural sector. Meanwhile, approximately 33% of water solutions sales (commercial and residential water purification systems) go to residential solutions. The company’s net sales are roughly evenly split between the three segments.

Pool products are a growing market

While the recovery in the housing market will provide a short-term boost to Pentair’s sales, it is important to note that 80% of sales in the pool segment are into the existing pool market. In addition, while new pool constructions will decrease in 2024, the number of pools will still continue to increase, supporting the long-term growth opportunity in the pool products market.

Management says non-discretionary spending per pool is around $400. Additionally, the increasing adoption of automation in pools, as well as new lighting, variable speed pumps and high-efficiency heating solutions, is paving the way for long-term sales growth potential in the existing pool market.

Image source: Getty Images.

Restructuring will increase profitability

Along with near- and long-term growth catalysts, Pentair management is engaged in a number of ongoing transformational initiatives to increase return on sales from 20.8% in 2023 to 24% in 2026.

Stauch believes these initiatives, which include targeted pricing, improved sourcing, lean management techniques and investment in automation, are essential to improving the efficiency of businesses acquired over the past 30 years. At the heart of these initiatives is the application of the 80/20 rule, or the Pareto principle, which says that 80% of the results come from 20% of the causes, when organizing sales, product range and production.

A stock to buy

not pentair Only a play on the booming housing market; it is also a company in the throes of a transformational margin improvement initiative, with excellent long-term prospects from continued increases in installed pools and improvements in water quality. Trading at 23 times estimated 2024 earnings, Pentair has outstanding growth prospects over the next decade. The company trades at a discount to Home Depot and has better growth prospects.