The expected cool-down in Canada’s housing market won’t be a good thing for companies serving consumers who do their own home renovations. This includes Toronto-based Canadian Tire Corp. Ltd. and Boucherville, Que.-based Rona Inc.

Canadian Tire is less affected by this trend because it sells many more products, including sports and recreation equipment; automobile parts and services; electronics; clothing (through Mark’s Work Warehouse); gasoline at its gas stations; and banking services.

Indeed, securities analysts like Canadian Tire’s short-term prospects. It’s the longer-term prospects that are worrisome; analysts aren’t convinced that the company’s initiatives to increase efficiency and services will deliver the strong earnings growth that its management expects.

As for Rona, it focuses on hardware and home renovation, competing directly against Home Depot of Canada Inc., Lowe’s Cos. Canada ULC, Home Hardware Stores Ltd. and many other smaller chains and independents. The sector currently has too much capacity, making it difficult for companies to increase earnings.

As a result, most analysts have a “hold” rating on Rona’s shares in the short term. However, they expect the firm to do well once things shake out in the sector and consider Rona a good long-term investment.

A closer look at the two firms:

> Canadian Tire Corp. Ltd. Ana-lysts like this stock in the short term because strong results in its financial services division are pushing up overall earnings. But net income won’t be increasing at the same pace by next spring unless both Canadian Tire and Mark’s Work Warehouse stores start driving growth — and some analysts aren’t convinced this will happen.

Bill Chisholm, research analyst in Toronto with Montreal-based MacDougall MacDougall & MacTier Inc., and Keith Howlett, analyst with Desjardins Securities Inc. in Toronto, both have one-year target prices of $73 for Canadian Tire’s stock. Vishal Shreedhar, analyst with UBS Securities Canada Inc. in Toronto, has a slightly lower target of $72. The 78 million Class A non-voting shares closed at $65.28 on Dec. 3, 2010.

Only the analysts at TD New-crest, a division of TD Securities Inc., had a “hold” rating on Canadian Tire’s stock, with a target of $65. A recent report says that success in the productivity and “in-store customer experience” initiatives the company has undertaken are essential for “valuation multiple expansion.”

Although Canadian Tire had gotten a bit lazy, Stephen Wetmore, who has been its president and CEO since January 2009, believes the retailer can do better. He is focusing on return on capital and improving customer service.@page_break@The firm has hired Britain-based consulting firm Dunnhumby Ltd., which specializes in “customer-centric research.” The focus is not so much on demographics but on what customers buy, Howlett explains. The aim is to make sure the best customers’ needs are met. It’s possible, for example, that some low-turnover items are purchased by these customers and shouldn’t be abandoned.

Canadian Tire’s efforts to improve its in-store service is complicated because the stores are franchisee-owned and it’s these dealers who decide how many people are hired. The franchisor can’t dictate policies; it can only suggest and provide incentives. Suggestions include trying to improve the stock of auto parts carried at the auto-repair centres, so repairs can be done more quickly, and booking appointments for auto repairs.

Howlett has seen some improvement, with customer service desks moved to more prominent posi-tions and greater knowledgeability among staff. But, he says, it’s still difficult to find staff.

Canadian Tire is also gradually improving its website. It only recently has offered a web-based tire selector, a tool its competitors have had for some time.

Net income was $272.5 million in the 39 weeks ended Oct. 2, 2010, vs $238.8 million in the same period the year prior. Revenue was $6.4 billion, vs $6.2 billion.

> Rona Inc. The retail hardware sector is overcrowded and new capacity keeps being added, primarily by Home Depot Canada and Lowe’s Canada. Analysts expect consolidation but don’t know when it will occur. Until it does, they aren’t enthusiastic about Rona as a short-term investment, although they think it could be a good long-term holding because it is profitable even in these times.

The same excess capacity happened in the U.S. in the 1990s, says Howlett, but it was solved relatively quickly when a number of sizable chains went out of business. However, there are fewer chains in Canada, so there isn’t the same potential for big chunks of capacity to disappear quickly. As a result, shrinkage in the sector is likely to be slow as small chains and independents go out of business. Among the big chains, only Lowe’s appears to be running at a loss, says Howlett, who estimates the earnings of various Canadian operations by looking at the notes relating to taxes on the annual income statements of Lowe’s and Home Depot’s U.S. parents.

Howlett likes Rona’s strategy in the meantime. It has been acquiring stores rather than adding to capacity and has entered the less crowded wholesale and rural hardware markets.

However, Chisholm says, Rona is less focused on shareholder value than is Canadian Tire. Thus, he has a “hold” rating on the stock, even though the share price is very cheap. He notes that Rona doesn’t pay dividends.

Chisholm’s 12-month target price for Rona’s stock is $16, Howlett’s is $14.50 and Shreedhar’s is $14. The 132 million outstanding shares closed at $13.36 on Dec. 3.

Only the analysts at TD Newcrest had a “buy” rating on Rona’s stock, with a target price of $16. The rating is based on the stock’s current, very cheap price, which a recent report says will rise in the next year. The report also points out that this stock price provides an attractive entry point.

Net income was $121.1 million in the 39 weeks ended Sept. 26, 2010, vs $107.4 million the year prior. Sales were $3.7 billion, vs $3.5 billion. IE