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Lennar Corporation (LEN), The Ryland Group, Inc. (RYL): US Homebuilders, Gaining Momentum?

The US housing market seems to be recovering amid low mortgage rates and an improving job market that is helping the economy to recover from the financial meltdown. Housing prices have increased dramatically and some analysts are fearful that this will lead into another housing bubble. Property prices increased almost 11% in March 2013 over the past year according to the S&P/Case-Shiller 20-city home price index, the biggest gain since 2006. This could signal an overheating in the housing sector.

This confidence in the homebuilding market has spiraled stock prices of some of the US homebuilders such as Lennar Corporation (NYSE:LEN), which is trading at forward price-to-earnings ratio of 26 times, while Meritage Homes Corp (NYSE:MTH) is trading at 19.5 times and The Ryland Group, Inc. (NYSE:RYL) at 13.6 times.

Lennar Corporation (NYSE:LEN)

Lennar: Solid results

Lennar Corporation (NYSE:LEN) has posted solid figures for the first quarter of 2013. Its revenue from home sales increased 40% to $855 million compared to the same quarter a year earlier, mainly caused by a 28% increase in home deliveries and a 9% average increase in sales price of those deliveries. Its net earnings surged more than 285%, from $14.9 million to $57.5 million in the same period comparison.

Credit: Lennar Corporation (NYSE:LEN)

This could be a good stock to use to gain exposure to the homebuilding sector. Moreover, some homebuilding companies have been pushing prices up as supply is very limited, something that could further increase profits.

Meritage Homes: Enjoying the recovery

Meritage Homes Corp (NYSE:MTH) builds and sells first-family homes across the western, southern and southeastern United States. This company is also enjoying the better market conditions. It posted a 39% increase in home closings and its homes orders improved 35%. The total value of its home orders improved as well, surging 69% for the first quarter of 2013 compared to the same quarter the previous year and totaling $520 million.

Meritage has been increasing its lot supply, reaching 21,029 lots under control in 2013 with net sales orders above their supply capacity. The company’s management expects a 40% increase in home closing revenue in upcoming quarters due to the larger backlog and sales, exhibiting a high confidence in the housing economic recovery.

Ryland: On top of the housing wave

The Ryland Group, Inc. (NYSE:RYL) is a homebuilder and a mortgage finance company. The company is geographically diversified, being present in 17 markets across 13 states. In the first quarter of 2013, the company posted a $374.7 million in revenue, a 73% increase compared to the same quarter of 2012. Its net income also soared from a net loss of $5 million to a profit of $22 million in the same period of comparison. The Ryland Group, Inc. (NYSE:RYL) reported increases of 54.4% in sales volume and 57.2% improvement backlog as compared to the first quarter of 2012. It also ended the quarter with a strong balance sheet with $614.6 million in cash and cash equivalents.

It seems that Ryland is another homebuilder that is recovering mainly because of the higher housing affordability levels, the low interest rates and increasing home prices due to a general tightening in national supply of housing inventory. All of that means that you should be aware of possible Fed cuts in the quantitative easing scheme as it could seriously affect the housing market.

This could be an excellent time to enter the housing market

Regarding valuation, Lennar Corporation (NYSE:LEN)’s price/earnings to growth ratio is around 0.58 times. This could indicate that, given its high forward price to earnings ratio of 26 times, the stock is undervalued. This happens with other companies in the peer group as well, such as Meritage.

Meritage is trading at a forward price to earnings ratio of 19.5 times with a price/earnings to growth ratio of 0.3 times which also indicates an undervalued stock given its potential growth in earnings per share. The market is bullish about the housing sector recovery, as Meritage’s stock price has already surged more than 77% from June 2012 to present date andis still expecting strong growth prospects.

Finally, The Ryland Group, Inc. (NYSE:RYL) is trading at a forward price to earnings ratio of 13.6 times and a price/earnings to growth ratio of 0.23 times. This also shows that it could be a good time to enter the market with the company as it is undervalued. This is because a low price/earnings to growth ratio is an indicator that investors will pay less for each unit of future earnings growth. Ryland’s stock has surged more than 100% since June 2012, so the start of a bubble in this market should not be discarded.

Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends Meritage Homes. Vanina is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article US Homebuilders: Gaining Momentum? originally appeared on Fool.com and is written by Vanina Egea.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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