Home Depot, Lowe's shares rise after Sandy

However, the home-improvement chains might not reap huge profits because of rising costs.

By Jonathan Berr Oct 31, 2012 11:48AM
Hurricane copyright Digital Vision Ltd., SuperStockShares of Home Depot (HD) and Lowe's (LOW) rose in early trading Wednesday as investors bet on a spike in demand from East Coast residents impacted by Superstorm Sandy. However, the profit bonanza may not be as large as expected because the home-improvement chains are also facing rising costs.

Home Depot, which is based in Atlanta, has been on a roll, gaining nearly 43% this year as Wall Street bet that the chain would benefit from a recovery in the housing sector. It also has been gaining market share at the expenses of rival Lowe's, which is up more than 26% this year, even though it reported disappointing earnings in the last quarter and slashed its profit outlook. 

Other retailers including Wal-Mart (WMT) and Target (TGT) may also benefit from increased storm sales, as should small engine maker Briggs & Stratton (BGG), generator company Generac Holdings (GNRC), and pump suppliers Pentair (PNR) and Xylem (XYL). Fluor (FLR) and other engineering and construction firms will get work rebuilding areas damaged by Sandy, though that may be months away. Meanwhile, companies adversely impacted by the storm may blame it for shortfalls in fourth-quarter results. 

Sandy, which decimated the Jersey Shore and parts of New York City, will cost insurers between $5 billion and $10 billion, according to The Daily Beast, citing data from Eqecat, which does risk modeling for insurance companies. Whether those figures are accurate is tough to say because the region hasn't experienced such a natural disaster in more than 100 years. 

Getting supplies to storm-ravaged areas won't be simple. As of Wednesday morning, much of New York City remains without power and the public transit system is crippled. Public Service Enterprise Group's (PEG) PSE&G, New Jersey's largest utility, reported that 900,000 customers remain without power. As I reported earlier this week, some retailers stocked up on merchandise like bottled water, batteries and milk that usually flies off the shelves ahead of serious weather events. However, they may have to sell the extra merchandise for little or no profit because they don't want to be accused of price gouging at a time of national crisis.

Investors will have to adjust to the realization that devastating once-in-a-lifetime natural disasters could become the "new normal." The ramifications for sectors ranging from manufacturing to retail to insurance are huge. Anyone who thinks they have figured out how to trade this new paradigm may be deluded.

Jonathan Berr is long Target. Follow him on Twitter@jdberr.



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