New home constructions in the U.S recently touched 5 year highs, thanks to Fed’s monthly liquidity injections in a low interest rate environment. As a result, home builders have had an enjoyable ride this year. However, analysts at S&P estimate that new housing starts could further increase by 34.6% in FY13.
The best way to play the housing boom would be to load into homebuilders, with maximum exposure to construction-related activities. PulteGroup, Inc. (NYSE:PHM), Toll Brothers Inc (NYSE:TOL) and D.R. Horton, Inc. (NYSE:DHI) are currently the market leaders, and also provide mortgage banking services.
A turnaround story
Out of entire industry, PulteGroup, Inc. (NYSE:PHM) has staged perhaps the sharpest turnaround. The company had reported a quarterly net loss of $1 billion in 2011, which quickly rose to a quarterly net profit of $81.76 million in the recent quarter. As a result, its shares have risen by nearly 390% over the last 2 years.
PulteGroup, Inc. (NYSE:PHM) had merged with Centex Corp in 2009 to form a construction behemoth. Their individual revenues aggregated to $11 billion in 2008, which deteriorated to just $4.6 billion in 2010 (post acquisition). Besides that, the merged entity also drained $2 billion of its cash reserves in a matter of just a year.
But the rebounding housing market is proving to be a boon for PulteGroup, Inc. (NYSE:PHM), as the company posted its first profit in Q1FY13 since 2010. For the mentioned quarter, its home sales revenue rose by 35% YoY, while it closings rose by 23% YoY. Its sharp turnaround was partly bolstered by a 10% increase in its average selling price (annual).
As of now, most investment research firms have an outperform rating for PulteGroup, Inc. (NYSE:PHM), primarily due to the rebounding housing sector and its extensive market penetration. Analysts at RBC Capital Markets have a price target of $32 per share, which calls for a 60% upside from its current price.
A Growth Play
Even D.R. Horton, Inc. (NYSE:DHI) is growing at a rapid pace. The company has six different business segments, out of which its home construction segment generates 97% of its overall revenues. This revenue mix not only reduces its banking related default risks, but also allows the company to perform like a pure play construction company.
For the recent quarter, D.R. Horton, Inc. (NYSE:DHI)’s order backlog stood at $2.386 billion as compared to $1.358 billion in last year’s quarter. That’s an impressive spike of 76%. Its quarterly net income surged by 173%, while its net sales orders rose by 34%. Its also worth noting that, its gross margins have appreciated by around 20% over the last 5 years.