Which Homebuilder Is Strongest?

by: Stephen Rosenman

The homebuilders have been one of the best performing groups over the last year, something I've been crowing about here and here and here. Most writers have been slamming them. With the (to some) surprising rise in home sales for March, the group has made a deserved spectacular move. So which home builder is the best of the best?

One key metric for deciding that honor is growth of market share. After all, with the collapse in real estate, many private builders have gone bankrupt. As competitors have left the business, it stands to reason that the remaining 12 publicly traded homebuilders would have gained market share.

I compared the builders' last quarterly reports on delivered homes to the corresponding 2005 - 2006 period.

Only 2 builders grew their market share significantly: DR Horton (NYSE:DHI) and NVR. DHI rose from 3.6% to 6.5%. NVR saw its share go from 1.5% to 3.2%.

The other builders were unchanged or lower: Toll Brothers (NYSE:TOL) 0.8% to 0.8%, Hovnanian (NYSE:HOV) 1.5% to 1.5%, Lennar (NYSE:LEN) 3.2% to 2.8%,KB Home (NYSE:KBH) 2.2% to 1.9%, Pulte (NYSE:PHM)/Centex (CTX) 9.1% to 7.5%, Ryland Group (NYSE:RYL) 1.9% to 2%, Standard Pacific (SPF) 1.3 % to 1%, M.I. Homes (NYSE:MHO) 0.6% to 1.1%, MDC Holdings (NYSE:MDC) 1.8% to 1.3%, Beazer Homes (NYSE:BZH) 1.4% to 1.2%. (PHM and CTX have been combined for their Q4 2005 delivered homes.)

At the end of 2005, these 12 builders controlled 27.0% of all homes built in the United States. Currently, they are responsible for 27.6% of home building.

Since I compiled the data, NVR reported and their home sales dropped to a 1.8% market share, leaving DHI the clear winner. In addition, DHI has gained share in each of the comparable Q4 2005 through 2009: 3.6%, 4.7%, 4.8%, 4.8%, 6.5%.
Clearly there is more to judging companies than market share: balance sheet strength, operating margins, for example. However, only DHI was able to take advantage of the downturn to grow their market share. It would make sense that when the real estate market improves, DHI is well placed. For those interested in this sector, DHI warrants a look.
Further, DHI has the added benefit of outstanding balance sheets.
DHI expects to receive $352 million back in NOL taxes refunds in Q2 2010. Their impairments have markedly decreased. Last quarter only $1.2 million in impairments were taken compared to $56 million the year before. They paid off $173 million in debt last quarter. DHI should be the "conservative" investor's home builder holding.

Disclosure: Long DHI and multiple home builders