D.R Horton CEO Donald J. Tomnitz exploited its market dominance to control costs as well as purchase land ahead of the other competitors who cannot command economies of scale. Mr. Tomnitz indicated that the company is set to add more homes to satisfy the strong demand being felt from different segments. He said, “We are anticipating a good spring selling season. We’ve put a significant amount of capital to work this quarter by increasing our investments in homes under construction, finished lots, land, and land development. D.R. Horton is in the best position it has ever been in its 35-year history.”
Vincent Foley and Cedric Morris, analysts with Barclays wrote, “D.R. Horton improved on its solid 2012 results and is well-positioned to benefit from increased demand during this year’s spring selling season.”
Macro Worries
The co-creator of the S&P/Case-Shiller index of property values, Robert Shiller said, “The housing market has been declining for something like six years now, it could go on, and that’s my worry. The short-term indicators are up now, it definitely looks better, but we saw that in 2009.”
On one hand, the property market saw values rising more than 7% in November when compared to a year earlier. This has been the ninth month in a row with an increase, as well as the biggest gain since May of 2006. Prices within normal levels have been increasingly common, while low mortgage rates are more frequent than a couple of years ago.
However, as the government is supporting most of those mortgages, a very abnormal market has been created. Sales of existing US homes also dropped during December, and were lower than most of the predictions from analysts. When taken in the context of a slow economy during the last five years and a subpar growth of the GDP, it’s not surprising that hesitation about the future of the housing market still persists.
Prices that assume growth
Growth can’t keep beating rising expectations. PulteGroup, Inc. (NYSE:PHM), the largest homebuilder by market value in the United States disappointed analystswith slowing home-order growth. To be fair its growth is still amazing: according to the Bloomfield Hills home orders increased by 27% during the fourth quarter. Apparently, amazing isn’t good enough to meet market expectations.
FBN Securities analyst Joel Locker said, “Pulte couldn’t meet lofty expectations. I don’t think sentiment could be higher in homebuilders. Investors expect significant earnings growth in the next few years to justify these stock prices.”
PulteGroup, Inc. (NYSE:PHM)’s stock price was punished even though it beat analyst estimates and last year’s fourth quarter numbers. Clearly, stock prices are vulnerable to even great news.
Valuation
I wouldn’t mind owning a stock that fluctuates randomly on price if it was trading at a compelling valuation. Do any of these homebuilder stocks stack up?
| KBH | KB Home | NA | 1.03 | 4.52 | 4.57 |
| TMHC | Taylor Morrison Home | 35.61 | 1.08 | 19.26 | 4.43 |
| DHI | D.R. Horton | 8.36 | 1.61 | 2.11 | 0.72 |
| LEN | Lennar | 12.8 | 1.88 | 2.26 | 1.35 |
| TPH | Tri Pointe Homes | NA | 2.75 | 1.58 | 1.5 |
D.R. Horton and Lennar are the most interesting of these stocks. They have low price-to-earnings ratios and low debt-to-equity ratios relative to their peers.
It’s fantastic to be working in the homebuilding business right now, but you should be picky about buying these stocks since some homebuilder share prices anticipate great growth. Lennar and especially D.R. Horton are interesting stocks in this group.
The article Are Homebuilders Keeping in Line With Impressive Industry Growth? originally appeared on Fool.com and is written by Bill Edson.
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