A House of Dreams
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the 1948 comedy ‘Mr. Blandings Builds His Dream House’ hapless NYC adman Jim Blandings (Cary Grant) and his wife, Muriel (Myrna Loy) flee big city cramped apartment living only to find that building a country home in Connecticut is a nightmare when the house they buy is a money pit from beginning to end. Jim Blandings makes $15,000 a year (multiply by at least 10 to get today’s equivalent) but that’s a drop in the bucket as he gets ‘rooked, tooked and schooked’ by all the contractors, architects and decorators with their hands out to finally get his dream house finished.
Our modern day Mr. Blandings can forego all that and have a house that the 1948 character could only imagine as science fiction. Smart homes with automation and links to mobile devices are available from almost all the major home builders. From the infamous Zuz-Zuz water softener that makes Mr. Blandings finally blow his top he could now get a Z-Wave Thermostat to adjust temperatures from his smartphone or other services to automatically lock and unlock the doors, etc.
Who’s the Dream Builder Now?
Why is there such a yearning to own a home; is it just ingrained in Americans? That’s more of an op-ed type question but it surely exists or this movie wouldn’t be such a classic. Or why homebuilders and associated industries were able to blow up the economy just like they had to blow up Mr. Blandings’ original house which was uninhabitable. Like with the film’s dream house the homebuilders practically had to start from scratch to make the sector investable.
One of the best now is Lennar Corp. (NYSE: LEN) which is betting on a multigenerational trend by building private suites within the homes for aging parents or millenials coming home after college. Sales have skyrocketed for these particular models.
The biggest by market cap, Lennar has 94,684 home sites and access to 16,702 more with options contracts. Like most of the homebuilders it provides financing, closing services and title insurance for home buyers. The company has a 13.43 P/E and a yield of .50%.
Lennar has had a major run in the last year up 151.15% and hit a multi-year high on September 7 of $34.22. Its 52 week low was $12.14. In fact, most of the homebuilders are putting the disasters of the past behind them. In July residential construction permits hit highs not seen since 2008. Prices are gradually rising and according to the Commerce Department, inventories have dropped by almost 70%.
CEO Stuart Miller has kept the faith owning 2,176,274 shares and four other officers own another 2 million shares. Institutions hold 107.30% of the float and there is still a significant short hold of 33.56 million shares who are getting killed lately.
Mind you, these builder stocks are volatile, any dip in housing starts or rumors of a rise in interest rates or even tight credit drops them like a brick. Also all of them have big debt loads which is the cost of doing business in this industry. Shorts also continue to try to take these down at any opportunity. They also track closely together as you can see from the chart below.
Another builder hitting multi-year highs is Toll Brothers Inc (NYSE: TOL) at $33.68 just last week Toll Brothers has no yield and a 61.78 P/E but as the stock market rises the rich are getting richer and they are becoming more willing to buy Toll Brothers’ high-end homes. Toll Brothers has had a very good run with more than a double from its 52 week low of $13.16. It has less debt than Lennar, however, it has $887.38 million cash to $1.96 billion total debt. One confidence-inspiring fact is that the two Toll brothers and co-founders, Robert and Bruce own more than 11 million shares between them. Institutions hold 83.40% of the float.
Maybe the best right here on fundamentals is DR Horton Inc (NYSE: DHI) which has the lowest P/E of these three at 7.55 and a higher yield at .70%. It just hit its 52-week high of $20.14 on September 7. While DR Horton ‘s market cap, at $6.4 billion, is only slightly smaller than Lennar’s it has a smaller debt ratio as well. Total cash is $1.17 billion to total debt of $2.10 billion.
DR Horton just bought itself a toehold in the Mississippi Gulf Coast and Alabama with its purchase of Breland Homes in August. Like the others, major officers hold big positions like Officer Donald R. Horton with 27,254,733 shares and CEO Donald J. Tomnitz with 1,069, 739 shares. The DR Horton average home cost is $200,000 nationwide so it has a tight grip on that middle-income market.
At its last earnings releas, gross profit was up 25% as were net sales. But one thing should be noted: the backlog increased by almost a third from a year before.
I could have discussed three other homebuilders who are also up big but they all had negative EPS and why not just go with what’s working well. The less stellar performers are: KB Home with -$0.085, PulteGroup, Inc with $-0.22 EPS or Hovnanian Enterprises, Inc. (NYSE: HOV) with -$0.68. Hovnanian was just last week upgraded by JPMorgan to a buy which I see as a positive for the homebuilders who are making money.
After all the disasters that Mr. Blandings endures building that dream house; after all the discouragement, Jim and Muriel Blandings still believed all along that they were building something wonderful together and for their family. Family friend and legal retainer Bill Cole (Melvyn Douglas) who’s been a naysayer and cynic all along, finally admits at the end,”Maybe there are some things you should buy with your heart, not your head. Maybe those are the things that really count.”
Awww. Great movie, you should see it. The homebuilders have certainly weathered a lot of catastrophes and are finally turning things around. But when you buy homebuilders make sure you do it with your head, not your heart. Because their earnings are the things that really count.
chart courtesy Yahoo Finance
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