In the first quarter, Lennar reported net earnings of $57.5 million on revenues of $989 million. Backlog of homes experienced a massive jump of around 82% in units as compared to previous year. The company has also acquired land worth $500 million, making it well-positioned for 2013 and 2014. This implies that the company has confidence in the housing recovery’s sustainability. The only concern is around the increasing cost of supply of new homes required to satisfy increasing demand, which management should watch out for. Lennar Corporation (NYSE:LEN)’s financial services division is also seeing positive earnings and contributing well to the overall business.
Another player in this industry is KB Home (NYSE:KBH)s, which is smaller in size than Lennar Corporation (NYSE:LEN) with the uniqueness of selling its signature “built-to-order” homes. As I mentioned in my last article on KB Home (NYSE:KBH)s, it is quite a small player in the industry, but has successfully created value for its shareholders via massive capital appreciation. The company has also declared a dividend of $0.025 per share in the second quarter as a result of increased operations and higher revenues. More recently, the company acquired 68 lots of land for a new community in the foothills of Jefferson Country alongside Red Rocks Country Club.
KB Home (NYSE:KBH)’s stock has appreciated over 52% for year till date, an impressive feat that raises confidence in the stock. The movement in its share price is being driven more by investor’s confidence than by pure statistics as the company is coming out of bad times and bad numbers.
The bottom line
All the points mentioned above, especially the housing recovery, definitely signal that Toll Brothers Inc (NYSE:TOL) is a buy. However, there is one big concern around the housing recovery phase relating to the quantitative easing plan. Earlier this month, the Fed signaled its intention to slow down the pace of quantitative easing as employment rates were improving and inflation was also stabilizing to a reasonable level. When adopted, QE results in low interest rates, which brings about a recovery in housing prices due to easy lending and higher consumer spending.
Since the Fed has signaled a slowdown in QE’s pace, some skepticism has surfaced around the recovery phase that it would be largely hit with such action by Fed. Even though there is no actionable plan around it, investors should keep an eye on the Fed’s actions around QE, as it could send housing stocks down
However, as of now I would maintain a buy on Toll Brothers Inc (NYSE:TOL) because there is no time frame attached to the Fed’s decisions around QE. Also, the company has got sizable business ahead of it that should bring in high revenues.
Mihir Mehta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article The Housing Recovery Is Making Luxury Affordable originally appeared on Fool.com.
Mihir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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