NVR, Inc. (NVR), D.R. Horton, Inc. (DHI), PulteGroup, Inc. (PHM): Betting On Homebuilders?

Although NVR, Inc. (NYSE:NVR) missed consensus badly, heavily influencing the stock’s recent underperformance, the company’s order backlog was $2.18 billion at the end of the first quarter, which was up 39% from a year earlier. NVR’s key advantages that helped to build this backlog are that it refrains from engaging in large land acquisitions and avoids building speculative homes without buyers.
NVR, Inc. (NYSE:NVR)’s major Mid-Atlantic housing market also has fewer underwater and foreclosed homes. Although NVR is one of the better positioned stocks in regard to moving higher, I think I have saved the best pick for last.
Meritage Homes Corp (NYSE:MTH) is a single-family home builder that designs, builds and sells homes in Arizona, Texas, California, Nevada, Colorado, Florida and North Carolina. Meritage managed to post a first-quarter 2013 EPS of $0.32, compared to the $0.15 loss that it experienced in the same quarter last.
After the first-quarter results, consensus EPS estimates for 2013 and 2014 were upped to $2.33 and $3.49, respectively, from the most recent consensus of estimates of $2.02 and $3.15.
Meritage operates primarily in the Sunbelt states, where demand for new homes is robust. Meritage has also made a successful transition from troubled markets such as Nevada. Meritage is one of the cheapest stocks in the industry and has an amazingly high expected 5-year EPS growth rate.
Don’t be fooled
The rebounding economy and housing market has been great for the homebuilders, but is there room for these companies to move higher? It appears that Meritage is one of the cheapest companies from both a price to book and forward P/E basis, trading at 2.5 times book value and 13.9 times forward earnings. Analysts also have the highest hopes for Meritage, with the 5-year expected EPS growth coming in at an annualized 67%, well above any of the other companies.
Although D.R. Horton, Inc. (NYSE:DHI) appears cheap at 2.2 times book value, its five-year expected EPS growth rate is only 8%. Ryland showed signs of the best growth in net orders and settlements at the end of the first-quarter 2013, but the stock is already too expensive, with the good news already accounted for.
PluteGroup would be a solid investment given its exposure to the rising population through adult communities, but yet again, it’s just too expensive. Meanwhile, NVR is also expensive at 3.3 times book value, but its recent net order and settlement numbers were the lowest of the five homebuilders and doesn’t justify that premium valuation.
I think some of the other homebuilders might already have the upside baked in, but Meritage could still be undervalued and has room to move higher, so that’s my homebuilder pick.
The article Betting on the Home Builders: Is It too Late? originally appeared on Fool.com and is written by Marshall Hargrave.
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