Three Homebuilding Stocks Get Legs
Friday, February 1, 2008 | Wall Street Strategies Is this Spam?The homebuilders are all moving up big, seemingly as a residual effect from this week’s rate cut. Pulte Homes reported Jan 31st, but its results showed nothing surprisingly good. January as a whole has been a good month for homebuilding stocks, as increased government intervention seems to be giving investors hope. We have also seen a number of earnings reports from major homebuilders, and while the losses they took were massive, there is some speculation that we have now seen the worse of the housing market. I don’t know if we have quite seen the worse yet, we might have another month or two of disappointment in home sales data, but in the long run I think we are going to see a turnaround sometime this year.
When KB (ticker: KBH) reported its earnings on January 8, it surprised us with the amount of revenue it earned. The company appeared to have sold more homes by enacting massive price cuts, so while its revenue was higher than we expected, its underlying gross margin was smaller, and thus its net income was about what we expected. Nevertheless, more home sales means the Company is generating cash, and that is the name of the game right now so when we eventually see a turnaround, KB should be able to take advantage. KB is not the strongest homebuilder, I would consider it an average performer amongst the market cap leaders, so it is a little more risky than say, Ryland or Centex but that risk gives it more upside. I would say investors might want to buy this stock sometime in the near future, but these homebuilding stocks aren’t going to go up in a straight line from here on out. There could very well be more blood to be spilled that could knock them back, but I would say a big dip in price is probably a good long term investment opportunity because a year from now the housing market should look a lot brighter than it does now.
Lennar (ticker: LEN) has been up along with the rest of the homebuilders and government intervention is contributing to lower mortgage rates and after several earnings reports from major homebuilders, Lennar included, there seems to be some speculation that the market has seen the worst of the housing crisis. The idea with the latest earnings reports, and Lennar was one of the biggest culprits of this, is that the homebuilders have essentially sold as many extra homes and land that they owned as they could. As home prices and land value has been falling, any extra inventory that the homebuilders hold is losing obscene amounts of value, and now a large portion of that inventory is off of Lennar’s books. The Company made a questionable move by selling land at fire-sale prices but what is important is it gathered cash in doing so. Lennar has a strong balance sheet now because it has done a good job of clearing its books and it has a substantial amount of cash to pay off debt with. Lennar is one of the largest homebuilders in the nation, and though it has been hurt a great deal this year, and relatively it should be able to lift itself off of the canvas without much trouble when the market begins to make a recovery. The question is when the recovery will happen. I still don’t think we have quite seen the worst yet from the housing market but we don’t have too much longer to go. It should make a turnaround sometime this year as Federal rate cuts make mortgage rates lower and home prices get temptingly low. I would say Lennar is looking like a good investment at this point, but we still may see some pain from the housing market over the next couple of months. A year from now, Lennar could be anywhere from $25 to $35 but it might dip back down some before it continues to appreciate. A big drop in its share price might be a good time to invest for the long haul.
Pulte (ticker: PHM) is also on the move up. It reported earnings Wednesday after the closing bell and that may have helped to some degree, but homebuilders as a whole are up big today and it seems to be a residual effect of the latest rate cuts and some speculation that perhaps we have seen the worst of the housing market. We have seen several earnings reports from major homebuilders, Pulte included, and we are seeing them sell and impair as much inventory as they can to clear their books and generate cash. Pulte was able to generate over $1 billion cash in 2007 and that’s a respectable amount; it can pay off a lot of debt with that. Most of the other homebuilders have been selling everything they can at discount prices, and while Pulte has been doing that to some extent, it has been “mothballing” more projects than most of them, which means they are completely abandoning some homes and waiting for prices to come back up so that they can sell them later at a profit, or more of a profit than they would make now. It’s plan appears to be a pretty good idea for the long term but it also seems like the Company has been having a little more problems than others in selling homes in the current environment. It lagged in new orders in its fourth quarter compared to the strongest homebuilders, and that might be because it didn’t lower prices enough. Pulte is strong enough to get through the housing market collapse, and I think the stock should have appreciated a year from now. The Fed’s rate cuts will lower mortgage rates and homebuilders will eventually sell through all of their inventory so we could see a turnaround in the housing market sometime later this year. That being said, I don’t think homebuilding stocks will go up in a straight line from here on out. We might see some more pain in the housing market over the next couple of months, so I would say that if you see a big dip in PHM’s stock price you might consider an investment for the long term.
Written by David Urani a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the homebuilding, staffing, medical devices, and logistical services industries.
