In our previous article, we had maintained our bullish stance on homebuilders, as homebuilder sentiment, existing home sales, and new housing starts increased last month. Recently, two major homebuilders, KB Home (KBH) and Lennar Corp (LEN), released their quarterly earnings, which continue to signal that the housing recovery is gaining traction. The results beat expectations as a result of an increase in new orders, home deliveries, and contract backlogs.
We remain bullish on KB Home, which has posted a surprise profit after some loss-making quarters; we expect a further upside in the stock. For Lennar Corp., although we recommended investors to decrease long positions to realize immediate profits previously, its splendid operating performance (especially the huge increase in its backlog) makes us bullish on LEN despite the fact that the stock has rallied appreciably.
We reiterate our previous recommendation of decreasing long positions in Pulte Group (PHM) and Toll Brothers (TOL), as a result of their high P/B multiples and significantly high share price appreciation on a YTD basis. D.R. Horton (DHI) is another favorite homebuilder of ours, which is also set to benefit from the continued recovery in the sector.
Earnings Releases - KBH and LEN
The following table is a summary of key housing determinants for the two homebuilders, who have recently reported their quarterly operating performances.
Increase in net orders (YoY)
Increase in backlog (YoY)
Decrease in order cancellation rate (QoQ)
Increase in home deliveries (YoY)
The company posted a surprise quarterly profit against consensus expectations of another quarterly loss. The most notable feature of its earnings release was an increase in its revenue backlog to its highest level since the global financial crisis. As is evident in the table given above, the company saw an increase in net orders and deliveries, which augurs well for its financial performance. The only negative point is the increase (3% QoQ) in order cancellation rate. However, relative to the last year, the order cancellation rate remained unchanged.
According to KBH Chief Executive Jeffery Mezger, "It is clear that the recovery in housing is gaining momentum across the country, as inventory levels are declining and home prices are on the rise."
The margins of the fifth-largest U.S. homebuilder increased to 17.5% this quarter, from 16.9% last year, and its average selling price demonstrated an increase of 8% on a YoY basis. "Based on our current backlog, we project that the trends of higher average selling prices and larger homes will continue going forward," Mezger said. The following table shows the comparison of its actual 3Q2012 results and the forecasts.
Revenue ($ million)
The third largest U.S. homebuilder by revenue reported exceptional Q3 results, as its earnings more than quadrupled, primarily as a result of an increase in new-home demand. The reported net income of 40c was well ahead of last year's 11c, and the forecasted 28c.
According to the company's CEO, Stuart Miller, "The homebuilding business is beginning to revert to normal, and that's a positive for the U.S. economy in general, which is in turn good for sustained recovery in the housing market. Overall demand has been improving and we've seen a consistent sales pace at improving prices."
LEN's contract backlog, which is an indicator of future sales, rose by a whopping 79% on a YoY basis. Its average selling price of delivered homes also increased to $258,000 from last year's $247,000.
Revenue ($ billion)
The following table is a summary of some of the key valuation metrics for the major homebuilders under our coverage.
Forward P/E (1 year)
Share price performance (YTD)
Source: Yahoo! Finance