It was reported yesterday that housing starts in the U.S. picked up again to register 917,000 new units started in February. This was the third month in a row the starts were over the 900,000 unit bar which started in December with a massive 973,000 units. Put another way, there were 2.8 million starts in the last three months compared to 2.573 million in September to November last year (9% increase). With the housing turnaround in full swing, this article will look at three recently upgraded homebuilders, Lennar (LEN), Toll Bros. (TOL) and KB Homes (KBH) that stand to benefit from a higher demand for new homes.
Lennar, one of the nation's largest homebuilders, was founded in 1954 and is headquartered in Miami, Florida. According to Yahoo Finance, as of November 30, 2012, the company owned 107,138 home sites and had access through option contracts to an additional 21,346 home sites. The past two days have been busy for Lennar, in addition to the housing start data it was upgraded to outperform and it released its first quarter earnings. Lennar currently has a $7.97 billion market cap and trades for $41.42 per share, near its 52 week highs. LEN is up 7.22% YTD and 54.78% over the past 52 weeks.
Analysts have a mean target price of $40.56 on Lennar and a median target of $43.50. The first quarter average estimate was $0.15 on revenues of $897.99 with full year EPS estimated at $1.60 on revenue of $5.46 billion (see positives below for earnings beats).
Positives for Lennar
- 1st quarter earnings came in at $0.26 per share over the average estimate of $0.15 per share.
- Deliveries for homes were 28% to 3,186 in the first quarter of 2013.
- New orders for homes were also up in the first quarter to 4,055 homes, a 34% increase.
- Also doing well this first quarter was Lennar's Financial Service segment that almost doubled its operating earnings from the prior year's first period, $16.1 million compared to $8.3 million.
- Lots of cash, with a market cap of $7.9 billion, Lennar has built up $1.1 billion as of February 28, 2013.
- Lennar currently trades with a P/E of 13.3, well below the industry averages 40.8.
Toll Brothers Inc.
Toll Brothers is also one of the nations leading homebuilders. Toll Brothers was founded in 1967, is headquartered in Pennsylvania and currently has a market cap of $5.9 billion. Shares for TOL are up 6.7% YTD and 38% over the last 52 months. At $35.10 per share, TOL currently trades 8.5% off of its January highs. Toll was upgraded from outperform to strong buy yesterday by analysts at Raymond James.
Analysts have a mean target price of $36.47 and median target price of $37.00 for TOL. For this, they expect earnings per share in the next quarter of $0.08 on $518.21 million and a full year EPS of $0.74 on $2.49 billion. Last year, reported revenues and EPS were $1.882 billion and $2.89 respectfully, so the estimates indicate an expected 32% increase in revenues.
Positives for TOL
- Strong balance sheet with debt/equity at 0.7, well below industry average of 1.1.
- P/E and P/B also under industry averages. P/B is 1.9 compared to the industry average of 2.2 and TOL's current P/E is 12 compared to the industry's 40.8.
- As reported in February, 1st quarter's revenues and deliveries were up 32% compared to the first quarter of 2012. Revenues for the first quarter cane in at $424.6 million and deliveries were at 746 units.
- First quarter net income was $4.4 million compared to 2012's first quarter loss of $2.8 million.
- First quarter 2013's net-signed contracts rose 52% to 4.34 units per community, this was the highest net-signed contracts for any quarter since 2006.
KB Homes is the smallest of the three homebuilders highlighted in this article with a $1.6 billion market cap. YTD, KBH is up 33% and 62% over the past 52 weeks. Yesterday, analysts at Raymond James upgraded KB Homes from market perform to outperform.
Analysts have a mean target price of $17.54 and a median target of $18.74 on KBH shares. Expected estimates for the first quarter, to be released tomorrow March 21st, is a loss of $0.22 per share on revenue of $359.80 million. Full year expectations for KBH is an EPS of $0.15 on $2.03 billion. Last year KBH had a loss of $0.77 per share on revenues of $1.56 billion. I will point out however, KBH was the only homebuilder in this article to have a negative EPS last year but, it was also the only company mentioned to have positive cashflows from operations. From these cashflows of $34 million, KBH paid $10.5 million in dividends and repurchased $1.2 million of its shares.
Positives for KBH
- Price to sales for KBH is at 1.0 compared to the industry average of 1.4.
- At the end of January, KBH reported that first quarter 2013's net orders increased 54% over net orders in the first quarter of 2012.
- Last quarter, KBH reported a 12% decrease in administrative expenses.
- Average selling price increased 10% in the fourth quarter of 2012 compared to the third quarter. Something to keep an eye on tomorrow.
Home buying is on the rise and these three companies are positioned to benefit directly from the recently increased demand for homes. While all three have risen over the past year, they all trade below their recession highs and offer long-term holders a lot of value.
An alternative and more diversified play on the three can be obtained by buying shares of:
- Dow Jones U.S. Home Constuction Index Fund (ITB). This ETF has all three companies listed amongst its top 10 holdings.