Should You Buy these Home Builders?

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Last Monday's home builder sentiment report surged for the month of June and broke 50, a key milestone that suggest builders view conditions as favorable versus poor. This is the first time that the index has broken 50 since April 2006. The index hit 52 for June, up from 44 in May and represents biggest one-month gain since 2002. The increased confidence among home builders coincides with an overall recovery in the broader housing sector. The index is 23 points higher than it was in June of last year.

Despite the threat of higher interest rates, home builders are confident that a pent-up demand exists. The builders are even more confident about single-family sales expectations for the next six months, as that index rose to 61 from 52 last month. The indices representing single-family home sales and buyer traffic also rose significantly. 

With all the positive news surrounding home builder confidence, let's take a look at three stocks that could benefit from continuing strength in home construction.

The big builders

Toll Brothers (NYSE: TOL) is one of the better-known home builders in the United States. The company builds detached and attached homes in luxury residential communities, develops high-rise luxury condominiums and for-rent luxury apartment complexes. It also develops and operates golf courses in various planned communities. Toll Brothers currently operates in 19 states. 

Toll Brothers' most recent quarterly report showed strong growth, as revenues grew by 38% and units delivered grew by 33% versus the same quarter in the prior year. Gross margins were nearly identical with the prior year. Selling, general & administrative costs declined to 15.4%, versus 18.3% in the same quarter last year. Looking ahead, Toll Brothers has a strong backlog of $2.53 billion which is a 69% increase from the same quarter last year. The company's CFO stated that gross margins and operating margins should increase in the second half of 2013 as the company expects revenues to increase over 50% versus the first half of the year. Toll Brothers was also able to access the debt markets and raise $400 million in order to support future growth and prepare for upcoming debt maturities.

PulteGroup (NYSE: PHM) engages in the building and development of single-family detached homes, townhouses, condominiums, and duplexes under three brand names. The company has approximately 670 active communities as of the end of 2012. 

PulteGroup also reported strong results in its most recent quarterly release.  Net income came in at $0.21 per share versus a net loss of $0.03 in the same quarter last year. Adjusted gross margins increased 4.2% and selling, general & administrative costs were 11.8% of revenues versus 15.2% in the prior year. The company has adopted a new focus emphasizing price, margin realization and the effective management of land assets. The successful execution of this strategy has been credited for the higher selling prices and increased margins reported. Looking ahead, the company has authorized investments in land and development of $1.4 billion annually for 2013 and 2014. 

Lennar Corp. (NYSE: LEN) engages in the building of single-family attached and detached homes throughout the United States. The company currently owns 107,138 home sites and had access through option contracts to an additional 21,346 sites. 

Lennar also reported strong results in the most recent quarter, with net earnings of $0.26 per share versus $0.08 in the same quarter last year. Operating margins improved by 4.1% and selling, general & administrative expense as a percent of revenue declined by 2.9%. The company's backlog in dollar terms was up 105% versus the prior year. The company spent almost $500 million on land acquisitions in the quarter and believes it is well positioned for 2013 and 2014; it is now focused on acquisitions for 2015 development.  Lennar issued $450 million of new debt in the quarter to finance future growth.

Time to buy?

All three of these companies have enjoyed recent success and seem confident about the future. The companies have made sound capital decisions, issuing cheap debt in low interest rate environments and taking advantage of increased housing demand and low mortgage rates. All three have significant backlogs and continue to make land acquisitions for future development. They have also witnessed margin expansion and believe this trend can continue.  

Despite looming increases in mortgage rates, demand is expected to continue for new homes. As the market continues to recover, these three companies look poised to benefit and can make solid additions to your portfolio.

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John Timmes 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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