Since late 2006, home prices in the United States have dropped, on average, a little over 30%, although drops have been much higher in some areas. Huge numbers of homes for sale, ample inventories of foreclosed homes, rough macroeconomic conditions, high unemployment, and harder-to-get mortgages have all put futher pressure on the housing market, halting a rapid recovery. It now seems, however, that demand is picking up again, supply is lower, and, as a result, home prices are starting to recover. Housing-related stocks were one of the hardest hit during the recession, so it might be a good time to consider buying these stocks at a discount, betting on the home price recovery.
In this article I will focus on three companies that engage in the production-side of residential properties (homebuilders). The three stocks have significant market caps and positive estimated EPS growth: NVR, Inc. (NYSE:NVR) , D.R. Horton, Inc. (NYSE:DHI) , M.D.C. Holdings, Inc. (NYSE:MDC).
NVR, Inc. (NYSE:NVR)
With regards to valuation, the stock currently trades at 28.83 times earnings, so it is hardly undervalued. However, the forward P/E is a much more attractive 13.35. When factoring in growth, the stock has a not very attractive PEG of 2.31.
Analysts are not overly bullish on the stock: It currently has an average recommendation of 2.60 (overweight-hold), and a price target of $977.75/share, which is lower than current prices. If the stock were to move from its current price to the target price, it would represent a price drop of 3.61%.
NVR does not pay a dividend to its shareholders, and has never done so since it started being publicly traded in 1993.
The stock is just 3.93% off its 52-week high of $1055.94, and has gained 10.26% YTD. It had a very good year in 2012, with the stock going up almost 35%. The stock is currently near its all-time high.
My take: The current P/E is high, and the stock’s PEG is hardly enticing, even though the forward P/E is more attractive. The stock has had a tremendous run since early last year, and it has good momentum, but mediocre valuations, negative ratings, and a lack of dividend make this stock a bit less attractive than some of its competitors. However, let us not forget that NVR, Inc. (NYSE:NVR) beat analyst expectations for the latest quarter by posting 27% growth in the top line, helping the company nearly double its net profit to $60 million. This is hardly a ‘bad stock’.
D.R. Horton, Inc. (NYSE:DHI)
The stock has a P/E of just 7.95, one of the lowest in the group. However, future P/E is a bit higher, at 15.31. PEG is 1.59.
Analysts are slightly bullish on the stock: it currently has an average recommendation of 2.40 (overweight/hold), and an average target price of $24.66, which implies a potential price upside of 9.55% from current price levels. Furthermore, the most recent analyst reports have given the stock a higher price target than the compounded average: On Feb 5th, Deutsche Bank gave the stock a price target of $25 and a ‘buy’ recommendation, Barclays gave it a $27 price target and an ‘overweight’ recommendation, and in January Gilford Securities initiated coverage of the stock with a $27 price target and a ‘buy’ rating.
D.R. Horton, Inc. (NYSE:DHI) pays a small dividend of $0.15/share, which works out to a yield of 0.67%. The company has paid a dividend to its shareholders since 1997.
The stock is 8.72% off its 52-week high of $24.66. It has gained 13.8% YTD. Unlike NVR, Inc. (NYSE:NVR)’s, however, D.R. Horton’s share price is below its all-time highs of $41.46 (2005), and seems not to have gone up as quickly as some of its competitors.
My take: Despite having weak operating cash flow, the solid EPS and revenue growth, the low valuations, the recent bullish analyst reports, and the good ROE make this stock one of the most attractive among mid-cap homebuilders.
| P/E | Fw P/E | PEG | Avg Rec | Avg Price Target (% implied upside) | Div Yield | |
| NVR | 28.83 | 13.35 | 2.31 | 2.60 | $977.75 (-3.61%) | N/A |
| DHI | 7.95 | 15.31 | 1.59 | 2.40 | $24.66 (+9.55%) | 0.67% |
| MDC | 30.07 | 16.31 | 1.07 | 3.00 | $36.63 (-4.83%) | 2.60% |
| Edge | DHI | NVR | MDC | DHI | DHI | MDC |
The bottom line
All three stocks should benefit from a rise in residential housing demand, and a continuing home price recovery. Except for D.R. Horton, Inc. (NYSE:DHI), the stocks tend to have relatively high P/Es, but their forward ratios look more attractive, and the financials seem to paint a brighter picture. If the housing market continues its recovery, homebuilders will soon start benefiting, albeit probably after transaction-based stocks like banks, REITs, or mortgage insurers, which are already experiencing a rebirth. While there might be some obstacles along the way, the housing industry is poised to recover eventually, so the group in general should experience price surges. However, I would recommend sticking to MDC or D.R. Horton, Inc. (NYSE:DHI) over NVR, Inc. (NYSE:NVR), as their lower PEGs and dividends might sweeten the wait.
The article Top Homebuilder Stocks That Could Surge With the Recovery originally appeared on Fool.com and is written by Alex Bastardas.
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