3 Housing Companies Focused on Margin Improvement
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The U.S housing market is recovering and contributing to the country's economic growth. The U.S. economy will grow 2.1% this year, up from 1.7% last year, driven by a tailwind from the strengthening housing market. The housing market is showing signs of long-term improvement with rising home prices, homes sales, and community count. Home prices in the U.S. increased 12.2% year-over-year in May 2013, and they will continue to rise over the next several years.
Let’s discuss three housing companies focused on margin improvement by increasing prices and community counts.
Higher margin and accelerated home sales
PulteGroup (NYSE: PHM) reported a gross margin of 18% in the first of 2013, up from 17.8% in the fourth quarter of 2012. The increase was due to the company’s shift towards higher-margin Pulte Brand homes and higher home prices. The company raised prices in 75% of its communities in the first quarter. Additionally, it is making efforts to reduce construction cost through commonly managed floor plans. These plans streamline construction design and raw material purchasing, resulting in higher margins. PulteGroup expects a gross margin of 18.8% this year and 20.2% next year. With these improvements in margin, earnings per share will rise to $1.40 this year as compared to $0.54 last year.
PulteGroup is one of largest homebuilding companies in the U.S. and has good growth prospects with the recovering U.S housing market. Operating in 28 states, the company has wide geographic exposure compared to its peers. This allows it to enhance its homes sales. It delivered 16,505 homes last year and expects to deliver 18,056 homes this year. It also expects to deliver 20,111 next year. With the rise in demand for homes, the company plans to increase the average home price delivered to $309,000 this year and $336,000 next year, as compared to $285,000 last year. The increase in both home delivery and price will result in the acceleration of its home sales to $5.3 billion this year and $6.5 billion next year, as compared to $4.5 billion last year.
Community count growth with increasing prices
Beazer’s Homes USA's (NYSE: BZH) homebuilding gross margin in the second quarter of 2013 was 15.2%, as compared to 10.3% in same quarter a year ago. Increases in prices and a reduction of sales incentives propelled this margin growth. To continue its gross margin improvement, the company plans to raise its average home price to $253,000 in this fiscal year, as compared to $225,000 last year. The increase in the average home prices will raise the company's margin to 15.6% this fiscal year, as compared to 10.5% last year.
The company had 148 active communities as of the second quarter of 2013. To enhance its community count, it has entered into land banking arrangement worth $150 million with GSO Capital Partners. The agreement will provide additional capital to the company for land acquisition and development activities, providing an additional 20 communities with several other land deals in the third quarter. Beazer will spend $550 million this year on land and development, allowing the community count to reach 170 in 2014. With the expansion of its communities, the company's total revenue will increase to $1.2 billion in fiscal year 2013 and $1.4 billion in the next fiscal year, as compared to $1 billion last year. Additionally, the company will generate a diluted earnings per share of -$1.69 this year in comparison to -$7.34 last year. It also expects a positive diluted earnings per share of $0.10 in 2014.
Improving margin and strategic acquisition
Standard Pacific (NYSE: SPF) reported a home sales gross margin of 21% in the first quarter of 2013, as compared to 20.3% in same quarter a year ago. Increased prices and order growth drove this margin improvement. During this quarter, the average sales price was up 9% year-over-year at $375,000, and new order growth was up 49% year-over-year. The company reported 527 new orders in April 2013, with an average sale price of $396,000. The company expects order growth of 39% this year, and it will increase its average sales price across all of its markets. This will result in improvements to its gross margin, which will be 23% this year and 24.6% next year.
On June 14, 2013, Standard Pacific announced the acquisition of homebuilding assets from Centerline Homes. The acquisition will strengthen the company's growth strategy by increasing its land supply, community count, and strengthening its position in important markets. The acquisition gives the company control of approximately 3,000 home sites with 30 current and future communities in Florida and the Carolinas. These states are important markets and together contribute 24% of the company’s total revenue. This will increase total revenue to $1.9 billion this year, as compared to $1.2 billion last year.
All of these housing companies are going to benefit from increasing home prices, with the increases resulting in higher gross margins. PulteGroup’s wide geographic exposure will help it to take advantage of recovery in the U.S housing market. Beazer Homes is increasing its spending on land and entering agreements to grow its community count, which will in turn drive its profitability. Standard Pacific’s asset acquisition from Centerline Homes and order growth will enhance its revenue and margin. Due to margin improvement and community count growth, a buy is recommended for all three stocks.
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Shweta Dubey 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!