Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Home-builders have been on a tear this year as the housing market appears to be getting back up to speed.
However, with most home-builders significantly outperforming the S&P 500, are they now over valued?
The four most prominent home-builders, Lennar Corporation(NYSE: LEN), Toll Brothers Inc(NYSE: TOL), D.R. Horton, Inc(NYSE: DHI) and PulteGroup, Inc(NYSE: PHM), have all outperformed the S&P 500 by at least 10% this year. PulteGroup in particular has outperformed the S&P by 111%, which makes the stock look significantly overbought.
Are these companies expensive compared to historic valuations?
So, compared to historic valuations, how do the current ttm P/E ratios of the four home-builders above look--are they overvalued?
After splitting the P/E ratios down, on a year-by-year basis for the four companies over the past ten years, it becomes apparent that surprisingly, PulteGroup was the only company that was relatively overvalued during the housing bubble at the beginning of the millennium. The other three companies, on valuation terms, remained relatively subdued.
Indeed, all of the companies apart from PulteGroup were trading on P/E multiples that were below the market average, which was 21.8 on average during the 2003-2008 period.
This chart highlights the comparison between the current ttm P/E figures for the four home-builders against their 10 year averages.
And, to place these companies under even further scrutiny, here is the data I have used on an individual basis.
Based on its historic P/E multiples, PulteGroup appears significantly undervalued, trading on a ttm P/E of 37 compared to a multiple in the hundreds back in 2002-2006. However, based on the rest of its peers in this article, I believe that the company could be overvalued, due to the premium the company is currently trading at compared to its peers.
Toll Brother’s ratios have been nothing but erratic during the past ten year,s but with EPS of $2.86 and a current ttm P/E ratio of 12.4 the company looks to have a full valuation – based on its historic performance.
So in conclusion, compared to historic ratios the four homebuilders above currently look to be well priced, with ttm P/E ratios that sit on the average figure for the past ten years. However, if the rally continues, the companies could start to look overvalued compared to historic valuations.
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