Meritage Homes Corp (MTH), Standard Pacific Corp. (SPF), D.R. Horton, Inc. (DHI): Is Now a Good Time to Invest in Residential Construction Companies?

After the financial meltdown of 2008, market confidence in the real estate sector became close to non-existent. The mortgage rates which were falling slowly before 2008 fell even more after the financial meltdown. The economic recovery, coupled with the historically lower mortgage rates, is fueling new demand for homes.

Source: Standard and Poor’s

The above chart shows the S&P Case-Shiller 20-City Composite Home Price Index. The index measures the value of residential real estate in 20 metropolitan areas of the United States. Home prices fell after the financial meltdown of 2008 and were static from the period 2010-2012. In recent months, we have seen the index rise as the housing markets start to generate higher activities, showing renewed confidence of the public in this sector.

Residential construction companies are surely going to benefit from the coming changes in the real estate markets. These companies survived the 2008 financial meltdown, but took huge financial losses. Only recently have these companies been able to show signs of growth in revenues and profits. Meritage Homes Corp (NYSE:MTH)Standard Pacific Corp. (NYSE:SPF), and D.R. Horton, Inc. (NYSE:DHI) are three companies that have operations in the residential construction business. Let’s analyze which one these three companies would be a solid investment.

Meritage Homes Corp (NYSE:MTH)Strong performance from Meritage

The company builds and sells first family homes. Its operations are centered around the southern, western, and the southeastern United States. In its 1Q13 financial reports, Meritage Homes Corp (NYSE:MTH) reported that, on a YoY basis, its home orders and home closings improved 35% and 39%, respectively. This positive change in the company’s performance was reflected in the YoY diluted EPS growth of Meritage Homes Corp (NYSE:MTH). The diluted EPS changed from $(0.15) per share to $0.32 per share.

The future of the company seems bright as backlogs improved 89% on a YoY basis. This means that real estate customers have now enough money and confidence to make their purchases. Due to the higher confidence, Meritage Homes Corp (NYSE:MTH)’s management also expects that home closing revenue would increase 40% in the upcoming quarters. From a holistic point of view, Meritage Homes Corp (NYSE:MTH) is enjoying the economic recovery in the United States and its future looks bright. I would give a Buy recommendation for this company.

Quality focus leading to growth for Standard Pacific

As mentioned before, house prices in the United States have been increasing. Standard Pacific Corp. (NYSE:SPF), in its 1Q13 financial results, reported that the average selling price of its houses increased 9%. Its $355 million in sales in the first quarter was a YoY increase of 61%. The company also experienced an increase (on YoY basis) of 48% in its home deliveries.

The company has also completed its acquisitions of select business assets from Centerline Homes’ homebuilding affiliates. The acquisition should prove very beneficial for the company as approximately 3,000 home sites, in Florida and the Carolinas, would come under its control. Standard Pacific Corp. (NYSE:SPF)’s CEO, Scott Stowell, was excited about the acquisition, stating that the move would bolster the company’s growth strategy by increasing the company’s land supply, community count, and move-up in several profitable markets.

Centerline Homes has a great reputation of building high-quality homes with a focus on customer service and solid product execution. I am very confident about Standard Pacific Corp. (NYSE:SPF)’s ability to produce great returns in the future and because of that, I would give a buy recommendation.

D.R. Horton’s hidden potential

D.R. Horton, Inc. (NYSE:DHI) manufactures a variety of homes that have price tags in the range of $100,000 to $600,000. The company has solid market penetration in the American middle class markets. The company’s focus on the middle income groups might be a sign of increasing profitability in the coming future as the financial meltdown of 2008 was particularly hard on the middle income groups.

The company has reported strong financial metrics since 2011. D.R. Horton, Inc. (NYSE:DHI)’s current EPS of $2.79 is 11 times higher than its EPS two years ago. I believe the company has room for additional growth as optimism spreads for a complete housing recovery. I say this because in the year 2006, D.R. Horton, Inc. (NYSE:DHI)’s revenue was as high as $15 billion. This means that the current revenue of the company is only one-third of its maximum revenue potential. Thus, the current economic trends are ripe for D.R. Horton, Inc. (NYSE:DHI).

Other news impacting the industry

Mortgage rates in the United States were up 0.5% in the last week of June. Mortgage rates are the bloodline for home sales in the United States. I believe the recent increase in the mortgage rates would not hurt the growing demand for homes because from a historical perspective, they are still very low. The increase in the mortgage rates, in my opinion, signals the growing optimism for the industry.

Another important fact here is that the velocity of the industry turnover is improving. This means that newly constructed homes, on average, are sold off much more quickly than before.

Final takeaway

After a long time, the real estate sector is showing signs of growth. Companies in the residential construction industry have immediately become star investments. I analyzed three companies in the industry with slightly different types of operations. All three of them have great outlook and would fit nicely in the portfolio of investors.

The article Is Now a Good Time to Invest in Residential Construction Companies? originally appeared on Fool.com and is written by Awais Iqbal.

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

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