Homebuilding Sector Stocks Double: 3 Stocks That Could Follow The Surge

Includes: HD, JCI, KBH, MTW, TPC
by: Hawkinvest

Even though many investors would have not thought that it would be possible, a number of homebuilding stocks have just about doubled in value in a very short amount of time. Some well-known homebuilders are even still losing money or are barely breaking-even and have seen a heavy level of interest by short sellers. However, that did not stop this group of stocks from becoming one of the best performing sectors of 2012. Investors have started to buy this sector due to a change in the trend, which shows that higher demand has created a surge in U.S. home construction. Recent data show that construction on single-family houses and apartments is coming in at the fastest rate in more than four years, and new building permits are up by about 12%, which means that the pace of building will become even stronger in the future. That is why shares of KB Home (NYSE:KBH) have jumped from about $6.50 in June, to nearly $17 per share today. That is a huge gain, especially when you consider that KB Home only reported a 4 cent per share profit in the most recent quarter, and that analysts expect it to post a loss for 2012 of about 82 cents and only a small profit of 14 cents per share for all of 2013. Many other homebuilding and home improvemement stocks have also seen huge gains; just look at Toll Brothers (NYSE:TOL), Beazer Homes (NYSE:BZH) and Home Depot (NYSE:HD), for example. Home Depot shares have nearly doubled off the 52-week low and now appear extended at $62 per share. Home Depot is expected to earn about $2.97 per share in 2012 and that puts the PE ratio at around 20 times earnings, which is well above the market average. It could be a great time to sell stocks like KB Home, and Home Depot, and invest those profits in stocks that are cheap now and could be poised for a similar uptrend in the coming weeks and months.

A big move in the home building and home improvement stocks is a very positive sign for the economy in general as strength in this sector usually portends future strength in job growth, auto sales, furniture sales and many other sectors. However, another set of building and construction-related stocks could be poised for a major rally that the market has not yet appeared to price in yet. A surge in commercial construction is poised to begin soon as companies ranging from tech giants like Amazon.com (NASDAQ:AMZN), Apple (NASDAQ:AAPL), to Facebook (NASDAQ:FB), and many others are building new corporate facilities. Amazon.com is building a number of new buildings that could add about 3 million square feet of new construction. Apple has plans for a corporate campus in Cupertino, California, which might run about 2.8 million square feet, and Facebook is about to expand its Menlo Park facility by adding on another 430,000 square feet. According to one recent Forbes article, these three companies alone appear to be adding about 10% of the entire market for U.S. office space. Thanks to very low interest rates and cash-rich corporate balance sheets, it makes sense for companies to build new facilities. There are are at least a couple companies that could be poised to benefit as this residential and commercial building surge plays out in the near future. Here are some stocks to consider buying now:

Manitowoc Company, Inc. (NYSE:MTW) is based in Wisconsin, and it is a leader in the cranes and foodservice equipment industry. If you have ever seen a massive crane at a major building site, you may have seen a Manitowoc crane. The foodservice division of this company will likely benefit from improving economic fundamentals that often occur when new home sales jump, and unemployment drops; however, the crane division could benefit most since that is what is used to build everything from skyscapers on down to much smaller projects like a truck mounted with a crane that could (for example) install traffic and street lights in a new-home community. Manitowoc has operations in 26 countries, so it will also benefit from a stronger global economy. This company has a product line that includes: Grove mobile telescoping cranes, Manitowoc lattice boom crawler cranes, Potain tower cranes, National Crane boom trucks and Shuttlelift industrial cranes. It also provides maintenance and repairs, which is a steady source of revenue.

Manitowoc shares have seen a pullback from the highs due to the recent market drop, and that could be a solid buying opportunity for long-term investors to take advantage of, for a couple of reasons. First of all, analysts expect earnings to nearly double from about 83 cents in 2012, to around $1.40 in 2013. Furthermore, this company has been considered to be an attractive takeover target, and buyout interest could come from a private equity firm or a major industrial company. With this stock trading at just about 10 times 2013 estimates and with construction trends pointing higher, this stock makes sense to consider.

Here are some key points for MTW:
Current share price: $14.28
The 52-week range is $8.30 to $16.97
Earnings estimates for 2012: 83 cents per share
Earnings estimates for 2013: $1.40 per share
Annual Dividend: 8 cents, which yields .5%

Tutor Perini Corporation (NYSE:TPC) could be one of the most undervalued stocks in this sector today. The market seems to have been ignoring the upside potential but markets are fickle and just as the homebuilding stocks went from cold to hot in a short time, this one could as well.

Tutor Perini is a leading construction and engineering company that owns several subsidiaries that provide design, construction, and many specialty contracting services. It is uniquely poised to benefit from an uptrend in the commercial construction market because that it what it is focused on. For example, its "Rudolph and Sletten" subsidiary has completed many corporate and industrial projects, which include: Boston Scientific's (NYSE:BSX) Building 55B (which is a 180,000 square foot manufacturing facility), Walgreen's (WAG) West Coast Distribution Center (which is a 440,000 square foot distribution facility), Pepsi's (NYSE:PEP) production and distribution facility (which was a 325,000 square foot facility), and many more. Clearly, this company will benefit as the demand for these types of major corporate projects increases from companies like Apple, Facebook, Amazon.com, and even smaller ones.

Tutor Perini already has enough in the project pipeline to last for almost two years. That means additional projects could be bid at levels that would lead to even higher profit margins for the company. At the end of the last quarter, Tutor Perini had a backlog of uncompleted construction work that was valued at $5.9 billion, and the company keeps winning new contracts. Just recently, Tutor Perini has announced it was awarded new contracts that include a $94 million project for UC San Francisco and a contract to repair the Washington Monument. At just about 6 times earnings, this stock could double in value and still be trading below the average PE ratio for the S&P 500 Index, which is about 14. Furthermore, analysts expect the company to grow earnings by about 50% in 2013, which seems possible based on the early signs of a turn in the commercial construction market.

When the market sentiment turns positive on this stock and prices in the earnings growth potential, I expect it to make a big move that will partially be fueled by shorts. The short thesis seems to be based on hopes for a continued lack of interest in commercial building stocks and the possibility of another recession, but that thesis did not work out for the shorts in the homebuilding sector and it might not work out here either since shorts have recently started to cover Tutor Perini shares. According to Shortsqueeze.com, short interest recently dropped by about 9% to about 1,152,000 shares, and that trend could continue. With average daily volume of nearly 200,000 shares, it could take shorts several days to cover their positions and this could add fuel to any rally. The recent drop in the market has pushed this and many other stocks lower, but that is just the buying opportunity that many longer-term investors seek.

Here are some key points for TPC:
Current share price: $10.15
The 52-week range is $9.21 to $17.49
Earnings estimates for 2012: $1.47 per share
Earnings estimates for 2013: $2.20 per share
Annual Dividend: None

Johnson Controls, Inc. (NYSE:JCI) has a number of product lines, some of which rely heavily on both residential and commercial construction. It designs and manufactures integrated heating, air conditioning, and ventilation systems, building management systems, commercial and industrial refrigeration, energy efficiency systems for buildings, fire and safety solutions for buildings, etc. However, this company also manufactures automotive products, which include car batteries, car interiors and seating. This part of the company is seeing pressure in some areas since European car sales are weakening in many countries. That has recently led to disappointing financial results and a stock price that is well below the 52-week high.

Johnson Controls reported a profit of 61 cents per share (for the third quarter), which was below analyst estimates of 66 cents per share. It cited soft demand and a falling euro as some of the reasons for the results and lowered guidance for the fourth quarter. While weakness in Europe could persist, this stock looks cheap enough to start buying on any dips to about $23, which is where the stock traded in early August. This stock could experience short-term weakness on negative headlines from Europe, however, in the long term it has significant upside potential. Analysts expect earnings of almost $3 per share in 2013, and if this stock were to trade at a market average PE multiple of about 14, the stock could be worth $42 per share, or about 50% above the current price.

Here are some key points for JCI:
Current share price: $26.42
The 52-week range is $23.37 to $35.95
Earnings estimates for 2012: $2.52 per share
Earnings estimates for 2013: $2.90 per share
Annual dividend: 72 cents, which yields 2.6%

While all these stocks are poised to benefit from a rebound in commercial construction, the only one I see as a "pure play" is Tutor Perini because it does not have the foodservice exposure that Manitowoc has, or the automotive exposure at Johnson Controls. Tutor Perini also does not have the European exposure that those other companies have. Based on those factors and a bargain-basement valuation, I believe Tutor Perini has the most upside potential. As the emerging rebound in commercial construction builds steam, I believe the market will recognize the tremendous value in Tutor Perini shares. However, I plan to consider adding all of these stocks to my portfolio in the near future.

Data sourced from Yahoo Finance. No guarantees or representations are made.

Disclosure: I am long TPC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.