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

Published on May 16, 2013 at 3:04 pm by The Motley Fool in News
The home builders have been on a tear since last month, and for good reason. Employment is rising and credit is loosening, which means more people are buying and building homes. Housing starts were up 27.5% year-over-year for 2012, and S&P Economics is expecting housing starts to rise another 34.6% in 2013.  As a result of these solid housing numbers, all the major home builders have been up an impressive 19% or more over the past two weeks with the exception of NVR, Inc. (NYSE:NVR).
The rising tide that is the bustling homebuilding industry has been lifting all ships (or homebuilding stocks.) The question is, is there room for any of them to move higher? The table below shows just how well the homebuilding companies are doing in terms of net home orders, home settlements, and average closing sales price. You can see that NVR, Inc. (NYSE:NVR) is on the low end for each of the categories in terms of percent growth, which is the reason for its underperformance.
Source:  CalculatedRisk.com

Although strong industry tailwinds have helped to lift all of these stocks, each respective homebuilder has been making their own changes to help position themselves a bit better in the industry.

D.R. Horton, Inc. (NYSE:DHI) is one of the largest national home builders, with a focus on single-family houses. D.R. Horton, Inc. (NYSE:DHI) managed to generate solid cash flow from operations despite the housing downturn of recent years. The company built up a cash to almost $650 million and now has homebuilding leverage of only 33%.

D.R. Horton, Inc. (NYSE:DHI)’s new home orders, backlogs and homes delivered were all up by double-digit percentages year-over-year for 2012. Meanwhile, the company is leveraging fixed costs to help increase production in an effort to meet stronger demand. This includes selective land acquisitions in an effort to ensure that there is enough supply in key markets.

The Ryland Group, Inc. (NYSE:RYL) saw a 47% increase in revenue for 2012, while consensus sees revenue jumping another 56% in 2013. First-quarter EPS results showed that new home orders (in units) increased 54% from a year earlier, with more new contracts and a strong increase in demand leading the way. Its first-quarter earnings beat was on the back of higher average selling prices and better margins. Unfortunately, Ryland is also the most expensive of these stocks from a price-to-book basis.

PulteGroup, Inc. (NYSE:PHM) was making various workforce reductions and cutting overhead costs during the housing downturn. This has helped the company reduce selling, general and administrative expenses substantially, while also helping to bolster the company’s margins. SG&A as a percentage of revenue went from 13.2% in 2011 to 11.3% in 2012.

PulteGroup, Inc. (NYSE:PHM) is one of the dominant builders of active adult communities. The key here is that this is one of the fastest-growing segments of housing, thanks in part to the increasing age of the population. The U.S. Census projects that the number of Americans in the 55-to-75 age group will reach roughly 80 million by the end of 2020.

Analysts believe that PulteGroup, Inc. (NYSE:PHM) will grow its earnings-per-share impressively over the next five years, though much like Ryland it is too expensive from a P/E and P/B basis.

NVR, Inc. (NYSE:NVR) posted first-quarter EPS of $6.84, compared to $3.90 for the same period last year. Unfortunately, this fell far short of consensus forecasts of $8.08. Revenue was up 28% last quarter on a year-over-year basis, but again fell well short of the 41% gain projected by consensus.

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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