Homebuilder stocks enjoy healthy gains after the NAHB sentiment index rose to its highest level since July 2005, with its six-month sales outlook also jumping to an 11-year high.
Despite rising mortgage rates, the post-election bounce in builder sentiment is consistent with other data showing U.S. industries are optimistic that Pres.-elect Trump will make it easier for companies to do business.
This morning's housing starts for October was off the charts - rising 25.5% from September to the fastest pace in nine years. Stripping out the notoriously volatile multifamily starts still leaves single family starts up 10.2% from September.
Of course, interest rates continue to rise - with the 10-year Treasury yield up another three basis points to 2.26% - but the builders can worry about that another time.
The S&P 500 is ahead 0.35%, with the homebuilders are outperforming by a mile.
Discussions about homebuilding M&A have been picking up of late, says analyst Will Randow, and he expects the next deal will likely be one public company acquiring another, rather than a smaller private player.
"Aside from the normal benefits of M&A, we believe larger public builders may be more inclined to acquire the young (i.e. smaller public) given the slower paced recovery environment that exhibits lower pricing power," says Randow, who picks D.R. Horton (NYSE:DHI) as best-positioned to be a buyer.
Other possible acquirers include: KB Home (NYSE:KBH), Meritage (NYSE:MTH), PulteGroup (NYSE:PHM), Toll Brothers (NYSE:TOL), and TRI Pointe (NYSE:TPH).
Potential targets: Century Communities (NYSE:CCS), Green Brick Partners (NASDAQ:GRBK), M.D.C. Homes (NYSE:MDC), Meritage (also on the buyer list), New Home (NYSE:NWHM), Taylor Morrison (NYSE:TMHC), UCP, William Lyon (NYSE:WLH).
Randow's top accretive scenario ... TRI Pointe buying William Lyon.
Mostly in the southeast region, the land includes that in which management believes investment in development in not justified, or located outside of served markets, or entitled for different product types than what the company typically offers.
KBH estimates it will take an inventory-related charge of $30M-$40M in FQ4.
The news came at the company's investor meeting yesterday. Other items:
Q4 financial targets are reaffirmed, and net orders for the first six weeks of Q4 gained 14% Y/Y.
For 2017, the company is aiming at housing revenue of $3.8B-$4.2B, ASP of $370K-$385K, operating income margin of 5.7-6.3%; average community count flat from 2016.
Shares fell 5.45% in very thin after hours trading.
Fitch notes KB Home (NYSE:KBH) was somewhat conservative in committing to land buys early in the housing recovery, and has accelerated spending in the last two years. The company shouldn't become stressed as long as it maintains minimum return parameters for land purchases.
While credit metrics have improved in the last few years, they remain generally weak, says Fitch. Thus the speculative grade.
The company announces the purchase of 13 acres in Cary, where it plans to build 41 homes at its Wynwood Community. Development is expected to start soon, with a grand opening planned for early next year.
KB Home (NYSE:KBH) currently has seven communities open for new homes throughout the Triangle market.
This new location is 10 minutes from downtown Raleigh.