Homebuilders have once again captured the limelight after one of the nation’s largest builders, Lennar Corporation LEN, announced another solid quarterly result last week.
After a strong first-quarter performance, the Miami, FL-based company beat the Zacks Consensus Estimate on both revenues and earnings in the second quarter. Adjusted earnings of 79 cents per share increased 30% year over year driven by solid revenues and improved SG&A leverage. Revenues jumped 31.3% on improved orders, home closings and higher ASPs. Moreover, this Zacks Rank #1 (Strong Buy) company increased its home delivery expectations for 2015.
According to Lennar, housing recovery continued at a steady pace in the second quarter. Management believes that the housing market is slated for a multi-year slow-but-steady recovery on the back of higher job numbers, a recovering economy, moderating home price gains, affordable interest/mortgage rates, rising rentals and a limited supply of inventory.
Housing data released this month clearly indicates a healthy pace of growth – an echo of Lennar’s positive comments. New home sales in the U.S. rose 2.2% in May – the highest level in almost seven years. Though housing starts fell 11.1% in May, building permits – a gauge of future construction – increased almost 12%, hitting a new six-year high. Existing home sales grew 5.1% in May, their highest pace in nearly six years.
Homebuilder sentiment is also upbeat. The National Association of Home Builders (NAHB)/Wells Fargo housing market index rose five points from May to 59 in June, the highest reading since September 2014.
With solid news releases one after the other, homebuilders are witnessing a strong run this month. Shares of large homebuilders like Pulte Group Inc. PHM, Lennar Corporation, D.R. Horton, Inc. DHI and Toll Brothers, Inc. TOL have gained roughly between 3–8% in June.
Better-than-expected results from Lennar and KB Home KBH have also fueled the optimism. KB Home reported decent second quarter fiscal 2015 results on Jun 19 while providing an encouraging outlook for the rest of the year. The Los Angeles-based homebuilder also expects the momentum to continue in 2016.
3 Stocks to Build Your Portfolio
As the housing sector gathers steam, we’ve zeroed in on three homebuilders other than Lennar which can be profitable if included in an investor’s portfolio.
Beazer Homes USA Inc. BZH
The Atlanta-based smaller homebuilder carries a Zacks Rank #1 (Strong Buy). Its share price has increased 3% this year. Over the past four quarters, the company has delivered an average positive earnings surprise of 62.64%. Its earnings are expected to grow 60% in the upcoming quarter (ended Jun 2015), results of which should be announced later this month or early next month.
Beazer Homes recorded better-than-expected order trends and higher selling prices in the second quarter of fiscal 2015 (ending Mar 2015) on improving home demand. The homebuilder saw a solid start to the spring selling season and is optimistic of continued strong results in the second half.
Pulte
This Atlanta-based homebuilder carries a Zacks Rank #2 (Buy). The company has expected earnings growth of almost 6% and a projected sales growth rate of almost 7%.
Pulte's large-scale business and geographic diversity, consistently improving profitability, commitment to drive higher returns while pursuing a more balanced capital allocation approach are encouraging. Though Pulte’s order trends have remained light over the past two years, the recovery seen in the past two quarters raises hope that volumes might improve in 2015 with the housing market growing at a slow but steady pace.
D.R. Horton
Texas based D.R. Horton also carries a Zacks Rank #2 (Buy). Its share price has increased 11% year to date. The company has expected earnings growth of 9%. It has delivered positive earnings surprises in the past two quarters.
D.R. Horton’s homebuilding revenues and order trends have remained strong over the past few quarters. Moreover, the company believes that it is well positioned to meet housing demand in the summer months ahead, supported by a solid community count and land position.
The company’s strong fundamentals including a broad geographic footprint, product diversity, strong land position and steadily improving order trends are encouraging. Moreover, the company is fast acquiring homebuilding companies in desirable markets which further diversifies its operations.
Conclusion
The Zacks Industry Rank for the homebuilding industry is currently at #43 highlighting the group’s positive outlook. Other small homebuilding stocks like MDC Holdings Inc. MDC, Meritage Homes Corp. MTH and Standard Pacific Corp. SPF also enjoy a Zacks Rank #2. It is therefore a good idea to invest in homebuilders now.
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