PulteGroup, Inc. (PHM), Lennar Corporation (LEN), Toll Brothers Inc (TOL): Builders Optimistic About Improving Home Sales

Page 1 of 2

U.S. home sales are rising — the month of April saw the second highest level of sales in three and half years. Improvements in the job market and a reduction in borrowing costs are believed to have encouraged home buying. According to Bloomberg, the U.S. Existing Home Sales Index rose 2.3% to 454,000 units in April, up from 444,000 in March.

The pace of home sales has also been faster than anticipated — in a survey of 76 economists, conducted by Bloomberg, their average estimate of April home sales was 425,000. The data reflects sales of more expensive homes, which rose the median selling price to a record high.

PulteGroup, Inc. (NYSE:PHM)

The shares of home builders such as PulteGroup, Inc. (NYSE:PHM), Lennar Corporation (NYSE:LEN), and Toll Brothers Inc (NYSE:TOL) should benefit from an improving real estate market still trying to find its footing after home values crashed in 2007.

Confidence up among home builders

Bloomberg reports that residential construction is receiving support from increasing demand for new and existing homes and fueling the current economic expansion. As property values begin to rise while mortgage rates remain at historically low levels, home builders will benefit from an increase in the number of households.

The median selling price in April increased by 14.9% from a year ago to $271,600 and reflects higher sales of homes costing $400,000 or more. The National Association of Homebuilders/Wells Fargo index of builder confidence rose to 44 from a revised 41 in the month of April. The index noted improvements in all three of its components — sales conditions, sales expectations, and number of prospective buyers.

Lennar sees market conditions improving

Lennar reported for the first quarter ending February 28, 2013 net earnings of $57.5 million and diluted EPS of $.26 a share, compared to 2012 first-quarter earnings of $15 million or diluted EPS of $.08 per share. According to the company’s press release, revenues increased due to a 28% rise in the number of home deliveries and a 9% rise in the average sales price of those homes to $269,000.

CEO Stuart Miller stated that he continues to see improvement in the market driven by low interest rates and low home prices. The company’s operating margin on home sales was 10%, an improvement of 410 basis points versus last year. As the housing market recovers, Lennar Corporation (NYSE:LEN) has also been an active purchaser of new land, about $500 million in the first-quarter, positioning itself for future building in 2015 and beyond.

The company’s average EPS for 2013 is $1.67 and next year is expected to be $2.34. Analysts estimate Lennar Corporation (NYSE:LEN)’s growth in 2014 to be around 40% and that rate drops dramatically over a 5-year period to just 3%. The industry’s average 5-year growth rate is about 21%. Lennar Corporation (NYSE:LEN) stock currently trades at 16 times 2014 earnings, so over the long term the share price may drop to meet decreasing growth and stabilizing home values.

PulteGroup’s buyers’ ‘sense of urgency’

PulteGroup, Inc. (NYSE:PHM) CEO Richard J. Dugas, Jr. saw strong demand in the housing market throughout 2012 that has carried over into 2013. He finds buyers have a greater sense of urgency due to limited inventory and rising prices throughout several markets across the country. The company’s first quarter ending March 31, 2013 reported net income of $82 million, or $0.21 per share, versus a net loss of $12 million, or ($0.03) per share, in first-quarter of 2012.

Page 1 of 2