The economy may be poised to paint the town red this spring, Bank of America's sixth annual paint contractor survey suggests.
"One of the more striking observations was the apparent resiliency of contractor backlogs," Bank of America analyst Steve Byrne wrote in a note released this week. "Despite a weak construction outlook, 36% of survey respondents have a larger backlog now than they did at this time in 2019, and 20% have a 10+% larger backlog."
The survey consisted of 45 professional paint contractors from across the U.S. who spend more than $5,000 annually on paint. About 7% of the survey respondents spend more than $100,000 annually.
"This [report] seems to match some of our recent calls with paint contractors who highlighted high 2023 bidding activity and lofty backlogs, particularly in commercial end markets," Byrne added. "The largest contractors ($100+k/yr in paint spend) had the greatest backlogs. This should provide a more favorable volume outlook in the first half for paint suppliers, but with potential contraction in the second half."
The findings have direct implications for "paint stocks," Byrne noted:
Home Depot (HD) and Lowe's (LOW): "The resilience of pro backlogs bodes favorably for Buy-rated Home Depot and Lowe's, for whom sales to pros comprise about 50% and 30% of their respective totals."
Sherwin-Williams (SHW): "These data are clearly favorable for the near-term earnings outlook for Sherwin, but we remain Neutral due to a more cautious second half outlook for U.S. residential and commercial construction."
PPG (PPG), Masco (MAS), and Axalta (AXTA): "We remain Buy-rated on PPG and Axalta due the auto and refinish exposures. We maintain our Underperform rating on Masco to reflect our view that do-it-yourself (65% of Behr brand sales) paint demand remains under pressure against difficult comparisons."
BofA's paint research is on the surprising side of things given the array of knocks the economy has taken only three months into the year.
March brought fresh banking turmoil that has weighed on consumer confidence. The month also brought another interest rate hike from the Federal Reserve, making it even more expensive to buy a new home or refresh an existing one with a couple of coats of paint.
All told, the GDPNow model estimate for real first-quarter GDP stands at 1.7%, down from 2.5% growth on March 31.
Byrne cautioned that paint contractors may be too hopeful about demand headed into the spring. But by and large, the demand signals offer a message of economic resilience headed into the spring shopping season.
"Our respondents may have slightly overestimated the 2023 paint demand growth as the 2023 paint volume growth expectation (vs COVID) is lower than it was in our October survey," Byrne said. "However, this still implies positive growth (vs COVID) on both a consolidated basis and for Paint Stores and Home Centers as well as year over year demand growth."
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis or anything else? Email brian.sozzi@yahoofinance.com
Read the latest financial and business news from Yahoo Finance
