Jamie Dimon Agrees; Housing Is Back

Includes: BZH, DHI, JPM, WFC, XLF
by: Valuentum

Since the turn of the year, the housing market has been on the mend, and homebuilders have been posting excellent results as of late. At the end of July, we more definitely announced that U.S. housing was back, and subsequent results and commentary have strengthened our thesis.

During the past several months, many U.S. major banking institutions and mortgage originators have been posting fantastic results. Both JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) announced increased mortgage originations and improved refinancing activity. JPMorgan CEO Jamie Dimon reiterated during an interview Friday afternoon that all of the key indicators within the housing market are positive.

Two homebuilders, DR Horton (NYSE:DHI) and Beazer Homes (NYSE:BZH) recently reported relatively strong fourth quarter results. DR Horton's revenue surged 21% year-over-year to $1.3 billion, while earnings exceeded consensus estimates, nearly tripling on a year-over-year basis to $0.30 per share. The company's unit backlog soared an impressive 49% year-over-year to 7,240 homes, while the backlog value jumped significantly as well, expanding 61% year-over-year to $1.7 billion. We like the company's current backlog distribution, which is heavily tied to the southeast, south central regions, and west coast regions of the U.S.; all of which are benefiting incredibly from the housing recovery and favorable demographic trends.

Beazer's results weren't nearly as strong, as the company struggles with a less favorable cost structure. Revenue grew 11% year-over-year to $370 million, slightly stronger than expected, while earnings continued to flounder, with the company losing $2.57 per share- though that figure was greatly influenced by a loss on extinguishment of debt. However, its cancellation rates continued to decline (down 310 basis points on a year-over-year basis) while its gross margins improve (up 190 basis points on a year-over-year basis). Beazer remains well capitalized for the time being, and similar to DR Horton, much of its backlog is in favorable regions.

Although we expect improving industry conditions to prevail, the homebuilders are fairly valued at current levels. Monetary policy will remain highly accommodative, in our view, but downside is possible if fiscal policy cuts off any benefits. Our favorite play on housing at the moment remains the Financial Select Sector SPDR ETF (NYSEARCA:XLF), which we hold in the portfolio of our Best Ideas Newsletter. We think continued strength from the housing market will boost the value proposition for banks, despite the potential for lower net interest margins and higher capital reserve provisions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: The XLF is included in the portfolio of our Best Ideas Newsletter.