The recent rise in home prices is a strong indicator that the economy is recovering. Meritage Homes Corp (NYSE:MTH) and Lennar Corporation (NYSE:LEN) have more than tripled after bottoming in August 2011. However, I believe these stocks should continue to provide capital growth to investors based on their most recent earnings reports and housing market outlook, and long positions may be initiated to gain exposure to this industry.
Business description and fundamental analysis
Meritage Homes Corp (NYSE:MTH) is trading with a P/E of 16.31 and a forward P/E of 13.90. Its PEG ratio is 0.45.
Lennar Corporation (NYSE:LEN) is trading with a P/E of 13.22 and a forward P/E of 18.75. Its PEG ratio is 4.16. Before its latest earnings report, the company was operating with a profit margin of 16% due to strong sales on a quarter-over-quarter basis.
The company looks appealing to the value-oriented investor because it may be considered “cheap” on valuation basis.
Home builders… a way to gain exposure to the housing market!
Meritage Homes Corp (NYSE:MTH) had an outstanding earnings report. For the three months ending March 31, its revenue grew from $204.3 million in 2012 to $336.4 million in 2013. Its operating expenses increased from $169.1 million to $271.9 million for the same period. As a result, its gross profit increased 83% from $35.2 million to $64.5 million. After other financial services costs, it posted net income of $12 million ($0.34 per share).
The company finished the quarter with net debt of $428.3 million and a debt/equity ratio of 0.60. Its cash and cash equivalents rose from $90 million to $325 million. Its solid business model allowed for the growth of the company. The company sold more homes, with 1,052 homes closed in 1Q 2013, 293 more than in 1Q 2012. Also, the number of houses ordered increased from 1,144 to 1,547 for the same period.
The company has strong real estate holdings which will help with expansion. What’s more is that the exposure to California, Texas, and Arizona will be beneficial in the future because the demand for new homes is robust in the Sunbelt states. It is currently one of the cheapest stocks in the industry and has an amazingly high anticipated five-year EPS growth rate.
Another major player in the housing business is Lennar Corporation (NYSE:LEN). According to Lennar Corporation (NYSE:LEN)’s most recent quarterly earnings report, its total revenue increased 36% from $724.8 million in 1Q 2012 to $989.9 million in 1Q 2013. Its net income increased $42.5 million to $57.4 million or $0.30 EPS, from $14.9 million or $0.08 for the same period. The company’s revenue from house sales jumped 40% to $868.4 million due to a hike in houses delivered. The company finished the quarter with net debt of $4.5 billion and a debt/equity ratio of 1.26.
The company delivered 3,186 houses compared to 2,482 the year ago. Further, its outlook seems stable since new orders grew from 3,022 to 4,055, totaling $1.15 billion. The company has also acquired land worth $500 million, positioning the company strongly for the coming years. It is evident that the company has confidence in its revenue-generation ability due to a continuously recovering market. In addition, the company also has a strong presence in Texas, Arizona, California, and Florida. The demand for new homes is increasing in these states, and Lennar Corporation (NYSE:LEN) should not have issues by raising the price for its properties.
Other major home-builders
To gain exposure to the housing market, investors may put their money to work in a basket of stocks. Meritage Homes Corp (NYSE:MTH) and Lennar Corporation (NYSE:LEN) may be considered for the long markets. Further, Toll Brothers and M.D.C. Holdings also have potential for capital appreciation in the near future.
Toll Brothers Inc (NYSE:TOL) and M.D.C. Holdings, Inc. (NYSE:MDC) have also reported net profits for the first quarter of 2013. Toll Brothers increased its revenue from $373 million for 2Q 2012 to $516 million for 2Q 2013. Its net income increased from $16 million, or $0.10 per share, to $24 million, or $0.14 per share. The company sold 894 homes in the second quarter of 2013, compared to 671 in the same quarter last year. Its contracts also rose to 1,753 from 1,290.
Toll Brothers Inc (NYSE:TOL) should fare well in the near future. Sales of high-end homes have started to pick up again and the company should see increasing demand for its properties. The builder has also acquired prime sites in Manhattan and Washington, D.C. The company is also confident that the demand for its homes will remain strong in the near future, and it places Toll Brothers Inc (NYSE:TOL) for more upside. In addition, Toll Brothers should continue to hike the price of its properties due to strong demand.
M.D.C. Holdings, Inc. (NYSE:MDC)’ revenue increased 80%. This resulted in a net gain increase to $22.5 million, or $0.45 per diluted share, from $2.4 million, or $0.04 per diluted share. What’s more is that its new orders improved 22% on a year-over-year basis to 1,300. The backlog increased 30% to 1,927 homes. As a proof that the housing market is picking up, the average selling price per home was $326,000 for 1Q 2013, compared to $298,000 for 1Q 2012.