PulteGroup, Inc. (PHM), Lennar Corporation (LEN): Building Out Your Portfolio

Since early May, the major home builders have been in free fall. The reason for the fall? Rising interest rates are supposedly threatening the housing rebound. Low rates, were in part, what helped to spur a rebound in housing demand. But rising interest rates could slow the demand for mortgages, leading  to slowing demand for new houses, which pushed the major home builders down over 15% in the past couple of months.

But could this be a great opportunity to jump into the homebuilders?

Top pick

PulteGroup, Inc. (NYSE:PHM) is the largest U.S. homebuilder, based on revenue. The stock tumbled another 10% last week offering investors another great buying opportunity.

PulteGroup, Inc. (NYSE:PHM)PulteGroup, Inc. (NYSE:PHM) targets all the major home buyers, but with a renewed focus on the retirement community. Back in the early 2000s, PulteGroup snatched up the leading U.S. home builder of active adult communities, Del Webb. PulteGroup is still the leading builder of retirement communities for those of age 55 years and older. The nice thing here is that retirement communities will be the fastest growing segment of housing over the interim, thanks in part to the aging out of the baby-boomer generation.

In my long case for PulteGroup, Inc. (NYSE:PHM), I found several reasons to love the stock, including its estimated $2.4 billion deferred tax asset that’s not currently on the books. Once booked, PulteGroup will trade well below its peers on a book-value basis. Beyond just the valuation, PulteGroup has other tailwinds that include a diversified geographical revenue stream and diversified target base.

PulteGroup, Inc. (NYSE:PHM) also initiated a $0.05 quarterly dividend last week, which is a 1.2% dividend yield. This annual dividend payout will be under only $80 million, where the company boasts some $1.7 billion in cash. To boot, the home builder also authorized a stock-repurchase program of $350 million.

Notable comps

Lennar Corporation (NYSE:LEN) is one of the largest, most geographically diversified U.S. home builders. Revenue is expected to be up 42% in fiscal 2013 after an already robust sales jump of 33% in 2012. For the March-ended quarter, Lennar posted EPS of $0.43, versus $0.21 in the same quarter last year, on the back of a 53% increase in revenue.

One of the key advantages for Lennar Corporation (NYSE:LEN) is the fact that it managed to amass a solid land position during the financial crisis. The company believes it has enough land to meet its home deliveries through 2014.

The other positive is that Lennar Corporation (NYSE:LEN) focuses on the higher-margin, well-positioned, communities, allowing it to avoid tertiary markets where price is the only driver.

Another major homebuilder is D.R. Horton, Inc. (NYSE:DHI), which also pays out a $0.15 quarterly dividend, a 0.77% dividend yield. Sales were up an impressive 24% in 2012, and are expected to be up an impressive 44% this year.

The company focuses on homes in the $100,000 to $600,000 price range, where the average selling price in fiscal 3Q was up 15% year-over-year. For 3Q, EPS came in at $0.42 compared to consensus of $0.34. As well, orders were up 12% year-over-year.

D.R. Horton, Inc. (NYSE:DHI), like Lennar Corporation (NYSE:LEN), also has a solid inventory of land, spending nearly $1 billion last quarter on land. Prior to the financial crisis, D.R. focused on first-time home buyers, yet, it’s transitioning to move-up buyers. First-time home buyers now only account for 47% of D.R.’s closings.

Bottom line

In a rebounding industry, I think the best play is the industry leader, PulteGroup, Inc. (NYSE:PHM). The company gets around one-third of its revenue from the retirement community, which should be a big benefactor of the aging population. Meanwhile, both Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI) could be solid investments given their significant land positions and broad geographic diversity. But PulteGroup is the cheapest on a P/E basis at 16.3 times earnings, compared to D.R.’s 19.4 times and Lennar’s 33.5 times.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Building Out Your Portfolio originally appeared on Fool.com.

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