These Builders Look Appealing for Your Growth Portfolio

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

The recent rise in home prices is a strong indicator that the economy is recovering. Meritage Homes (NYSE: MTH) and Lennar (NYSE: LEN) have more than tripled after bottoming in August 2011. However, I believe these stocks should continue to provide capital growth to investors based on their most recent earnings reports and housing market outlook, and long positions may be initiated to gain exposure to this industry.

Business description and fundamental analysis

  • Meritage Homes is trading with a P/E of 16.31 and a forward P/E of 13.90. Its PEG ratio is 0.45.
  • Lennar is trading with a P/E of 13.22 and a forward P/E of 18.75. Its PEG ratio is 4.16. Before its latest earnings report, the company was operating with a profit margin of 16% due to strong sales on a quarter-over-quarter basis.

The company looks appealing to the value-oriented investor because it may be considered “cheap” on valuation basis.

Home builders… a way to gain exposure to the housing market!

Meritage had an outstanding earnings report. For the three months ending March 31, its revenue grew from $204.3 million in 2012 to $336.4 million in 2013. Its operating expenses increased from $169.1 million to $271.9 million for the same period. As a result, its gross profit increased 83% from $35.2 million to $64.5 million. After other financial services costs, it posted net income of $12 million ($0.34 per share).

The company finished the quarter with net debt of $428.3 million and a debt/equity ratio of 0.60. Its cash and cash equivalents rose from $90 million to $325 million. Its solid business model allowed for the growth of the company. The company sold more homes, with 1,052 homes closed in 1Q 2013, 293 more than in 1Q 2012. Also, the number of houses ordered increased from 1,144 to 1,547 for the same period.

The company has strong real estate holdings which will help with expansion. What’s more is that the exposure to California, Texas, and Arizona will be beneficial in the future because the demand for new homes is robust in the Sunbelt states. It is currently one of the cheapest stocks in the industry and has an amazingly high anticipated five-year EPS growth rate.

Another major player in the housing business is Lennar. According to Lennar’s most recent quarterly earnings report, its total revenue increased 36% from $724.8 million in 1Q 2012 to $989.9 million in 1Q 2013. Its net income increased $42.5 million to $57.4 million or $0.30 EPS, from $14.9 million or $0.08 for the same period. The company’s revenue from house sales jumped 40% to $868.4 million due to a hike in houses delivered. The company finished the quarter with net debt of $4.5 billion and a debt/equity ratio of 1.26.

The company delivered 3,186 houses compared to 2,482 the year ago. Further, its outlook seems stable since new orders grew from 3,022 to 4,055, totaling $1.15 billion. The company has also acquired land worth $500 million, positioning the company strongly for the coming years. It is evident that the company has confidence in its revenue-generation ability due to a continuously recovering market. In addition, the company also has a strong presence in Texas, Arizona, California, and Florida. The demand for new homes is increasing in these states, and Lennar should not have issues by raising the price for its properties.

Other major home-builders

To gain exposure to the housing market, investors may put their money to work in a basket of stocks. Meritage Homes and Lennar may be considered for the long markets. Further, Toll Brothers and MDC Holdings also have potential for capital appreciation in the near future.

Toll Brothers (NYSE: TOL) and MDC Holdings (NYSE: MDC) have also reported net profits for the first quarter of 2013. Toll Brothers increased its revenue from $373 million for 2Q 2012 to $516 million for 2Q 2013. Its net income increased from $16 million, or $0.10 per share, to $24 million, or $0.14 per share. The company sold 894 homes in the second quarter of 2013, compared to 671 in the same quarter last year. Its contracts also rose to 1,753 from 1,290.

Toll Brothers should fare well in the near future. Sales of high-end homes have started to pick up again and the company should see increasing demand for its properties. The builder has also acquired prime sites in Manhattan and Washington, D.C. The company is also confident that the demand for its homes will remain strong in the near future, and it places Toll Brothers for more upside. In addition, Toll Brothers should continue to hike the price of its properties due to strong demand.

MDC Holdings' revenue increased 80%. This resulted in a net gain increase to $22.5 million, or $0.45 per diluted share, from $2.4 million, or $0.04 per diluted share. What’s more is that its new orders improved 22% on a year-over-year basis to 1,300. The backlog increased 30% to 1,927 homes. As a proof that the housing market is picking up, the average selling price per home was $326,000 for 1Q 2013, compared to $298,000 for 1Q 2012.

MDC has announced that its home building subsidiary, Richmond American Homes of Florida, closed its purchase of The Oaks at Boca Raton. The project is set to start in the fourth quarter of 2013, and revenue should growth significantly. According to Florida Realtors, sales of single-family homes increased 10% for the first quarter of 2013 on a year-over-year basis. The strong demand for houses in the region should propel MDC’s earnings higher.

In addition, MDC has announced its entry into the Orlando, FL, market by the purchase of Brynmar and Bella Lago. These projects are scheduled for grand opening in the second quarter of 2013. The presence of MDC in Florida will be beneficial since the demand for new homes in the state is strong.

Market outlook

The housing market outlook looks favorable for investors to own building companies. Sales of existing houses have increased for 20 straight months on a yearly basis. Also, total sales rose 0.8% in February to a seasonally adjusted annual rate of 4.8 million. Sales in the southern region of the United States rose 2.6% in February, where Meritage Homes has a strong presence.

According to United States official data, the national median home prices increased from $170,600 in January 2012 to $173,600 in January 2013. Further, a recent study by Urban Land Institute and Ernst & Young expects home prices to rise by 6% in 2013, 5.3% in 2014, and 5% in 2015. This should further increase home builders’ revenue.

Bankers also believe that the housing market will improve in 2013. According to a survey, 83% of the bankers believe that the level of mortgage delinquencies will decrease or stay the same, a significant improvement over the last quarter. Further, most respondents believe that home prices are rising at a sustainable pace.

Also, it is estimated that the U.S. needs 1.6 million new houses per year to meet the demand from population growth. By 2009, the number of new houses was 554,000, while 945,000 new houses are expected in this year.

Lastly, I believe that the housing market should see solid gains due to steady job growth and improved consumer confidence.

Conclusion

The housing market seems to be improving with the overall economy, and I believe investing in building companies would be a good choice. So far, we have stacked all possible odds in our favor, overall improved economy, declining unemployment rate, increased consumer confidence, strong demand for new homes, and rising home prices. These companies offer excellent investment prospects and the stocks may be bought as a basket to gain exposure to the housing industry.

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!


Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Meritage Homes. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure