Why Investing in These 2 Homebuilders Is a Good Idea

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

Thanks to recovery in the U.S. housing market, the housing industry will witness an upsurge in growth in the years to come.

The nation's demand for homes will range between 1.2 million to 1.5 million a year, and home builders are gearing up to fulfill the demand. The companies discussed in this article are all from housing industry, and they are capitalizing on the market’s rising population and emerging job opportunities. Expanding in this market will increase the companies’ revenue and will enhance the shareholders’ value.

Let’s discuss them in detail.

Cost-reduction for improved margins

Lennar (NYSE: LEN) recently acquired 287 acres of residential land from Covington Capital in San Antonio. This land will support 800 homes and sales will begin in mid-2014. These home sites will be available in three communities, Potranco Run, the Heights of Cibolo, and Alamo Ranch. Depending on the community, homes will be available in the $100,000 to $200,000 price range. This initiative will enhance its market presence in San Antonio, leading towards higher home sales for the company, which will increase from merely $3.49 billion in 2012 to $7.01 billion in 2014   

Lennar purchased low-cost land during the downturn of the U.S. economy. With the growing demand for residential homes, the company will now monetize it in the coming quarters. Further, the company is implementing common floor plans for constructing homes, which will also reduce its cost. The company is expecting to construct 18,500 homes this year, which is up 35% year-over-year. The company will take advantage of low-cost land purchased, and its cost-initiative methods, to increase its operating profits. These will increase from $11.6 million in 2012 to $27.2 in 2013, and it expects Earnings Per Share  to increase from $1.88 in 2013 to $2.46 in 2014, followed by $3.50 in 2015.

Lennar’s competitor, PulteGroup (NYSE: PHM), is also adopting cost reduction strategies to provide low-cost homes. In 2012, the company reduced construction cost 10% by working directly with suppliers. To reduce construction cost further, the company is adopting a technique of value engineering and commonly managed floor plans. This will systematically add value to its homes while reducing the cost.

These techniques will contribute to a cost reduction of $3,500 per home, leading towards improved gross margins. With these techniques, Pulte expects its gross margin to increase from 18% in 2012 to 18.8% in 2013, followed by 20.2% in 2014.

Expansion for future benefits

KB Home (NYSE: KBH) has been acquiring land in San Antonio over the last two years. On June 12, 2013, it announced to acquire approximately 200 acres of land in this market. It will build a community named CrossCreek in San Antonio comprising of 600 homes. This community will open in two phases, with first phase opening by the end of 2013 and the second phase by the early 2014. The company will offer 12 different home designs. This vast variety of designs will boost demand, which will increase the company's home revenue. KB Home anticipates a revenue upsurge from $1.5 billion in 2012 to $2.1 billion in 2013 followed by $2.5 billion in 2014.  

U.S. market recovery is growing the demand for residential properties. Therefore, the company is constructing 184 new communities this year and 209 in 2014. The average selling price in these communities will be between $285,000 and $290,000. This will contribute towards the company’s total revenue; Analysts expects its revenue to increase from $1.5 billion in 2012 to $2.1 billion in 2013 followed by $2.5 billion in 2015.    

Bottom line

Both Lennar and KB Home are adopting various strategies to capitalize on the rising demand for homes in the U.S. This will lead towards more revenue for each company. The companies are moving towards high population areas to take the advantage of the shortage of supply. In addition, rising cost concerns are forcing the companies towards various cost cutting initiatives that are leading towards higher margins. I recommend a buy for both stocks.

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!

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