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The recently-released housing data has supported our previous bullish thesis on the homebuilding sector. New-home and existing-home sales have increased while the S&P Case-Shiller Home Price Indices have also shown healthy signals. Consequently, homebuilders' stocks have maintained their upward incline, as the share price of most of these companies increased more than 50% this year. Our favorites in this sector remain KB Home (NYSE:KBH), Lennar Corp (NYSE:LEN), D.R. Horton (NYSE:DHI), PulteGroup (NYSE:PHM) and Toll Brothers (NYSE:TOL). We also reiterate shorting SPDR homebuilders ETF (NYSEARCA:XHB) in order to hedge long positions in homebuilders' equities.

Yesterday, the S&P released data for the S&P Case-Shiller Home Price Indices, the leading indicators for the U.S. homebuilding sector, which reaffirmed our bullish thesis on the housing sector. This is because all the three composite indices increased simultaneously for the first time after the summer of 2010. The following table shows a YoY increase in each of these three indices:

S & P Case-Shiller Home Price Index

Year-over-year (YoY) Growth

U.S. National

1.2%

20-city Composite

0.5%

10-city Composite

0.1%

The following graph shows the historical movements exhibited by each of these three indices.


(Click to enlarge)

Source: S & P

The figures for July's new-home and existing-home sales were released last week, which also spell housing optimism. New home sales rose by 3.6% in July to rise to a seasonally-adjusted 372,000-unit annual rate, which is equal to the 2-year high levels reached in April. This figure beat the Street's outlook for 365,000. New-home inventory also dropped to record-low levels, after dipping by 0.7% in July. U.S. Existing Home Sales also rose in July from their 8-month low levels, a YoY rise of more than 10%. The National Association of Home Builders/Wells Fargo Index, an indicator of homebuilder confidence, also increased in August to its highest level since 2007.

Although lingering unemployment and stringent lending standards have reduced the pace of a rebound of the housing sector, the fact that mortgage rates are hovering near record-low levels, along with the recent optimistic housing data have been fruitful for homebuilders' stocks. The following chart shows the YTD share price movements of major homebuilders: D.R. Horton, PulteGroup, Lennar Corp., KB Homes, Toll Brothers, Beazer Homes (NYSE:BZH) and Ryland Group Inc. (NYSE:RYL).


(Click to enlarge)

Source: Google Finance

In addition, Toll Brothers - the largest U.S. luxury homebuilder - has reported splendid quarterly results. Its 3Q2012 per-share earnings were 36c, beating consensus estimates of 18c and last year's earnings of 25c. Its revenues also jumped by 41% from previous year's levels to $554.3 million. Toll's net orders showed an increase of 57%, while its CEO proclaims that it has seen the most sustained demand in over five years. The following table is now updated to incorporate the new figures for TOL.

KBH

PHM

RYL

LEN

DHI

BZH

TOL

Decrease in order cancellation rate (% QoQ)

10%

1%

-2%

2%

-1%

-2.5%

-2.2%

Increase in Quarterly Backlogs (% YoY)

22%

31%

47%

61%

31%

39.50%

44%

Increase in Number of New Orders (% YoY)

3%

32%

41.6%

40%

25%

29%

57%

Source: Qineqt's calculations

As is evident from the previous stock price graph, all homebuilders have surged by a huge amount this year. Our favorites remain KBH, LEN, DHI, PHM and TOL, in decreasing order of preference. Although some of them like LEN, PHM and TOL are trading close to their 52-week highs, we still see a further upside, though limited, as the housing sector continues its rebound phase. The following table shows some crucial points to look at from a valuation's perspective.

KBH

PHM

RYL

LEN

DHI

BZH

TOL

Forward P/E (1 year)

-

14.64x

15.62x

23x

20.27x

N/A

30.2x

Price/Book (MRQ)

2.25x

2.57x

2.54x

1.91x

1.71x

1.62x

2.01x

Dividend Yield

0.90%

N/A

0.50%

0.5%

0.8%

N/A

N/A

Source: Yahoo Finance

Source: 5 Stocks To Buy To Play U.S. Housing Recovery