Builders Optimistic About Improving Home Sales

Eileen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

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.

The shares of home builders such as PulteGroup (NYSE: PHM)Lennar (NYSE: LEN), and Toll Brothers (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 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'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 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 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.

PulteGroup's first quarter home sales revenues were $1.1 billion, a 35% increase compared to $814 million in the same period for 2012. Gross margin was 22.9% and rose 420 basis points over 2012 and 110 basis points over last year's fourth-quarter. New orders were valued at $1.6 billion, 18% higher than last year's orders valued at $1.3 billion.

For 2013 and 2014, the company has increased investments in land and development to $1.4 billion annually. PulteGroup's growth rate for 2014 is expected to be 18% and over the next five years it is estimated at 33%, above the industry average. With its current price trading at 13 times 2014 projected earnings, the company seems like a compelling buy.

Toll Brothers notes good time to build homes

CEO Douglas C. Yearley, Jr. also sees a sense of urgency in buyers as home prices have increased and demand continues to rise. Toll Brothers had a significant second quarter 2013, with a 57% increase in the dollar value of its home sales and a 36% increase in the number of units sold; the biggest quarterly increase in seven years.

Net income was $24.7 million, or $.14 per diluted share, versus net income for second quarter of 2012 of $16.9 million, or $.10 per diluted share. Second quarter revenues were $516 million, increasing 38% over the same period last year, and 894 units were delivered in the period, a rise of 33% over last year. Gross margin, excluding interest and write-downs, was almost unchanged from last year at 23.3%.

Full year 2013 EPS is estimated at $.81 and next year it is projected to increase to $1.51. Toll Brothers estimated growth rate for 2014 is an impressive 86% and its 5-year number is 62%, well above the industry average. The stock currently trades at 22 times 2014 earnings, so these shares present another buying opportunity.

Conclusion

As the housing market continues its recovery, investors can expect home sales to continue to improve. The home builders discussed above are already showing results and expectations of better days ahead.

The three companies mentioned have betas that are well over 1, so expect considerable volatility in the share price. Both PulteGroup and Toll Brothers appear to be better choices for an investment term exceeding one year. Lennar's expected low growth after 2014 and its relatively high debt to equity level of 125 is something investors should watch closely before deciding to buy.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, “3 Strong Buys for a Global Economic Recovery” outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


Eileen Rojas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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