Housing statistics continue to amaze with resilience. According to the numbers released by the National Association of Realtors, seasonally adjusted index for pending home sales rose 1.5% during March to 105.7. This is the highest level for the index in three years.
Steady job additions and historically low mortgage rates are some of the factors fueling the traffic of buyers. This is fueling a long standing rally in housing stocks as well, which has taken prices of companies such as Toll Brothers Inc (NYSE:TOL), Standard Pacific Corp. (NYSE:SPF), and NVR, Inc. (NYSE:NVR) to high levels. However, these stocks are still not overpriced and could go higher in the next leg of rally. Here is how:
Market underestimating Toll Brothers Inc (NYSE:TOL)
Pennsylvania-based Toll Brothers Inc (NYSE:TOL) has a price to book value ratio of just 1.8, lowest among its peers. The stock has seen wild movements in the last six months, and has found strong momentum again on its journey north. The company is adequately levered, but not excessively laden with debt. Currently priced at 12 times its earnings, the stock is reasonably placed, but does not seem to factor the robust revenue growth we have seen in recent quarters. In the first quarter ended Jan. 31, the company posted a 31.9% growth in revenue to $424.6 million.
As a result, the company posted a profit of $4.4 million compared to a loss of $2.8 million. The results came slightly below Street expectations, which caused selling pressure. However, it is worth noting that the top line growth is intact — enough for analysts at Barclays to up the price target to $41 and rating to overweight.
Earnings potential almost free
Like most other home builder stocks, Standard Pacific Corp. (NYSE:SPF) has also seen a sharp appreciation in its stock price. Having gone up 28% so far this year, the stock is close to its 52-week high. However, it still trades at a price to earnings multiple of 7.3, which is certainly not very high. Another multiple indicating tremendous undervaluation is the price to book value ratio which is currently at 1.55. This means the company’s valuation is at a premium of 55% to fair value of its hardcore assets.
Given the way stock price has gone up in recent months, this is not very high, and almost feels like the business is going at net asset value. For 2012, the company posted vastly improved financial results. Its revenue grew over 40% to $1.26 billion while gross margin improved to 19.7% from 18.4% in 2011. As a result, profitability stood at $531.4 million. There is little evidence so far to suggest that this trend of improved financial performance will be disrupted in 2013.