Lennar Corporation (NYSE:LEN), PulteGroup, Inc. (PHM): Why Investing in These 2 Homebuilders Is a Good Idea

Thanks to recovery in the U.S. housing market, the housing industry will witness an upsurge in growth in the years to come.

The nation’s demand for homes will range between 1.2 million to 1.5 million a year, and home builders are gearing up to fulfill the demand. The companies discussed in this article are all from housing industry, and they are capitalizing on the market’s rising population and emerging job opportunities. Expanding in this market will increase the companies’ revenue and will enhance the shareholders’ value.

Let’s discuss them in detail.

Cost-reduction for improved margins

Lennar Corporation (NYSE:LEN) recently acquired 287 acres of residential land from Covington Capital in San Antonio. This land will support 800 homes and sales will begin in mid-2014. These home sites will be available in three communities, Potranco Run, the Heights of Cibolo, and Alamo Ranch. Depending on the community, homes will be available in the $100,000 to $200,000 price range. This initiative will enhance its market presence in San Antonio, leading towards higher home sales for the company, which will increase from merely $3.49 billion in 2012 to $7.01 billion in 2014

Lennar Corporation (NYSE:LEN) purchased low-cost land during the downturn of the U.S. economy. With the growing demand for residential homes, the company will now monetize it in the coming quarters. Further, the company is implementing common floor plans for constructing homes, which will also reduce its cost. The company is expecting to construct 18,500 homes this year, which is up 35% year-over-year. The company will take advantage of low-cost land purchased, and its cost-initiative methods, to increase its operating profits. These will increase from $11.6 million in 2012 to $27.2 in 2013, and it expects Earnings Per Share  to increase from $1.88 in 2013 to $2.46 in 2014, followed by $3.50 in 2015.

Lennar Corporation (NYSE:LEN)’s competitor, PulteGroup, Inc. (NYSE:PHM), is also adopting cost reduction strategies to provide low-cost homes. In 2012, the company reduced construction cost 10% by working directly with suppliers. To reduce construction cost further, the company is adopting a technique of value engineering and commonly managed floor plans. This will systematically add value to its homes while reducing the cost.

These techniques will contribute to a cost reduction of $3,500 per home, leading towards improved gross margins. With these techniques, Pulte expects its gross margin to increase from 18% in 2012 to 18.8% in 2013, followed by 20.2% in 2014.