D.R. Horton, Inc. (NYSE:DHI) is also one of the largest U.S. homebuilders, and in fact in 2005 it became the first builder to sell more than 50,000 homes in a single year. For the same reasons as mentioned for Lennar, D.R. Horton, Inc. (NYSE:DHI) also returned to profitability in 2010 and has stayed there since. These two companies are actually very close to each other, investment-wise, with nearly identical financial results over the past several years. Between the two, I would give the edge to D.R. Horton for two reasons. First, at 19.3 times this year’s earnings, it is slightly “cheaper” than Lennar Corporation (NYSE:LEN). Also, when comparing the balance sheets of both companies, both have right around $1.1 billion in cash on hand, but D.R. Horton, Inc. (NYSE:DHI) has about half the debt load of Lennar which is a significant difference when it comes to long-term profitability of a business.
Alternate Approach: Home Depot
Perhaps the homebuilders are too risky for you. Another way to play the housing recovery while still being able to sleep at night is with The Home Depot, Inc. (NYSE:HD), the nation’s leading home building and home improvement retailer. Home Depot is a good way to play because it works whether the market for new homes improves or not. At 24.6 times earnings, Home Depot might sound pretty expensive, but consider a couple of points. The Home Depot, Inc. (NYSE:HD) has an excellent track record of profitability, and has produced solid earnings numbers (and raised its dividend) every year in recent history. Also, if homebuilders are projecting a 33% increase in sales, that means 33% more supplies will be needed to build those new homes. Finally, Home Depot is one of the most shareholder-friendly companies in the market. While their 2% dividend isn’t the best, they more than make up for it with an excellent share buyback program. In fact, since 2009, the number of outstanding shares has dropped by about 11%. Not bad for bad economic times!
Conclusion
While KB Home (NYSE:KBH) may indeed produce the best gains if all things go well with the housing recovery, that is a big “if”. If you insist on one of the homebuilders, D.R. Horton, Inc. (NYSE:DHI) looks like the way to go, with Lennar Corporation (NYSE:LEN) not too far off. The safest way, by far, is through a retailer that supplies homebuilders as well as existing homeowners who need to renovate and make improvements, like The Home Depot, Inc. (NYSE:HD).
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends The Home Depot, Inc. (NYSE:HD).
The article Time To Consider The Homebuilders Yet? originally appeared on Fool.com.
Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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