D.R. Horton, Inc. (DHI), KB Home (KBH): Investing in These 3 Homebuilders Will Not Disappoint You

2012 was a stable year for the housing market, with respect to both volume and prices. According to a study by Fiserv Inc., home prices could further increase 0.6% by the end of the third quarter of 2013. Additionally, the expected growth in prices for the next five years is around 3.3%.

With the expected rise in the near future, holding on to the right housing stock can make all the difference. Scouring the investment landscape, I have three recommendations from the homebuilding industry. These stocks have the potential to benefit from the macro factors prevalent within the industry. Let’s discuss them in detail.

Lennar Corporation (NYSE:LEN)

By the end of fiscal 2013, Lennar targets an increase in its community count by 20%. Currently, it is active in 459 communities, but expects to increase its reach to 550. I believe that the growth should be concentrated mainly in the second-half of 2013, because of the current land holdings and stages of development, which will delay Lennar in bringing its targeted communities to completion.

The increase in the count won’t give all the help needed for growth. The conversion into actual sales is also important. For this, the high backlog conversion rate of the company comes in handy. Lennar maintains a high conversion rate within the range of 90%-100%. Although, the rate in the first-quarter did not fall in this range, it is expected to improve to around 90% in the later part of the year. This is in conformity with the fact that the major increase in community count is expected only in the later part of the year.

In the last quarter, Lennar revealed its plans to scale-up the multi-family construction business. The company has been in this business for the past two years, and now it aims to grow substantially over the next couple of years. It has 6,500 apartments in its pipeline, worth about $1 billion. It is expected that the construction of 3,000 apartments should begin in 2013.

About 25% of investment in these properties is required in the form of equity; and the rest in debt. They provide a long-term opportunity for Lennar to generate an attractive IRR of 25% to 45%. I do see some headwinds, as the comps of multi-family houses in the country for January 2013 were sequentially low, but the year-over-year growth was impressive.

The company has a decent pipeline of multi-family projects that should drive growth. Additionally, the aim to expand the community count should give some additional upside to the stock. Though the backlog conversion rate may face some headwinds in the short-term, the long-term position of the stock seems strong.

D.R. Horton, Inc. (NYSE:DHI)

Fiscal 2013 for Horton seems robust, considering the end of the first-quarter in which the company had an inventory of 14,200 units, of which 52% are speculation homes (spec homes). Spec homes give an added advantage to buyers, as the customers know exactly what they are buying and they don’t have to wait for a long duration before moving-in.

This gives spec homes a competitive edge over the custom homes, and helps a lot in their sales. The company maintains a backlog conversion rate of about 70%. In the coming quarter, a slightly higher backlog conversion rate is expected due to its spec home sales. I believe the company is in a strong position for the selling season in spring, and should see strong net order growth in the second-quarter.

In addition to this, the company has a high lot count. This gives the D.R. Horton, Inc. (NYSE:DHI) a strong base for growth. In the last quarter, the total lot count increased to 177,000 which means the availability of sufficient supply for the next 8-9 years.