Which homebuilder stocks could nail it?

The sector is facing a threat from rising rates, but a few builders still have plenty of promise.

By Jonathan Berr Aug 26, 2013 8:30AM
One of the great ironies of the housing recovery is that it hasn't been seen in the stocks of some big homebuilders. In fact, the sector has gotten clobbered this year amid rising mortgage interest rates and inconsistent earnings.

Shares of PulteGroup (PHM), the top homebuilder by revenue, have slumped more than 11% this year. D.R. Horton (DHI), which is tops in volume, has tumbled 4.7%. And Toll Brothers (TOL), the leader in luxury homes, is off 2.1%. These declines, however, are overdone.
For one thing, the housing recovery remains pretty much on track, even with Friday’s report that new home sales in July fell by 13.4%. The blame is being put on higher mortgage rates and rising prices in some markets where supplies have gotten tighter. However, even though 30-year fixed-rate mortgages recently hit 4.58%, a two-year high, it's important to remember that rates have been at historic lows and still aren’t high enough to stop home buyers cold. 

In fact, homebuilders’ recent results also are showing some encouraging signs. Pulte's average selling price rose 9% to $294,000 in the most recent quarter. Stronger demand from so-called move-up buyers looking for bigger homes boosted D.R. Horton’s average selling price by 15% to $268,000. Toll's average price of homes delivered rose 13% to $651,000.

Home under construction (© Corbis)People continue to be optimistic about the housing market. A whopping 76% of respondents to a recent Pulte homeowners' poll believe they can sell their current home in the next two years for a price that would allow them to move into a new one. Toll CEO Doug Yearley recently said, "we believe the recovery is real."

Of the stocks mentioned here, all have good promise, but Toll has the most compelling story. Its target of wealthier consumers appear to be less troubled by the hiccups in the economy than those less flush with cash. During the latest quarter, Toll's backlog hit 4,001 units, a gain of 56%. Unfortunately, Toll's latest quarterly earnings lagged analysts' forecasts.

The Pennsylvania company's price-to-earnings multiple is 11.37, lower than Horton's 15.4 and Pulte's 21.2. The average 52-week price target on Toll is $37.58, about 16% higher than where it recently traded. But analysts see a whopping 27% upside potential in D.R. Horton and a possible 23% gain for Pulte.

The one downside to Toll is, unlike its rivals, it doesn’t pay a dividend. But for investors who have a moderate tolerance for risk, the stock could offer some good rewards.

Jonathan Berr does not own shares of the listed stocks. He has done freelance writing work for Toll. Follow him on Twitter @jdberr.
Tags: DHIPHMTOL
11Comments
Aug 26, 2013 9:47AM
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In 2012 $88 billion of real-estate purchases were by Chinese investors.  Well there has been a recovery it has not been with those who we want to see recover, AKA the middle class.  While this foreign investment does help the country, it can not sustain a recovery without the middle class..
Aug 26, 2013 10:11AM
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Buying a home is clearly a "local" decision. You can't look at markets in L.A., Arizona, and Georgia and assume it's the same in Parker Colorado?? and... 4.58% is still incredibly super, extraordinary and outstanding interest rates compared to the high as hell rates before 2008. So don't blame interest rates. The era of buying to "move up" someday has passed.. it's not coming back like $1.45 gasoline... move on..  buy a home to live in.. it's not a piggy bank.. We've learned a valuable lesson here in America.... companies don't hire employee's for the long term.. we've been viewed as disposable... expendable..... Income is not guaranteed over 30 years.. and neither is a pay raise. The problem with financial advice and planners is that they are speaking in a different tongue to the average buyer... The reason people want a bigger home is so they can move in family that can't afford to live anywhere else on their own or that families need to pool resources for aging members. Every "paycheck" , S.S. check, Tuition check.. or resource can be funneled into a larger home with more bedrooms. I'd rather pay $560k with 7 bedroom than $268k with 4 bedrooms. (bigger home more space.. and everyone is fighting together to survive the stupidity on Wall Street and employers who want to pay everyone minimum wage or maximize profits to horde for board members or investors (who are rich in the first place). When you start talking market share, stock investments in construction... people's eyes start to glaze over.... they don't understand the connection and quite frankly.. don't have the resources to invest in a shaky job market...Put it simple it's survival mode for most families.. .and wishing for a return to time prior to 2008 and just insane.. who wants to pay $178K for 1650 sq feet @ 13.5%??? really? Get a grip.. we don't want that to come back... EVER...
Aug 26, 2013 11:56AM
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I would like to know how long until this building bubble bursts.  The average home prices were over $250,000.  Where are the jobs coming from to suport $250,000 mortgages? 

 

$250,000 with zero down over 30 years at 4% is $1,200 a month!  Not including PMI which is required if you dont have 20% down.  Add in homeowners insurance and you have over $1,500 a month in home expenses.  Thats $18,000 a year.  I keep reading how the average household income is $65,000 but I have a feeling that stat is inflated by all the CEOs making over $10 million a year because a lot of jobs I see in the paper are paying $10 to $12 an hour and youre not making $40,000 a year making $12 an hour unless youre working 60 hours a week and not many companies are giving 20 hours of ot every week.

Aug 26, 2013 10:30AM
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Hum, I do not see very many single family homes being built here, most are town homes, condo's and a few duplex's. What is being built where you are?

Aug 26, 2013 1:51PM
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Same here Nope Not,

 

I live next to one of the richest towns in New England, and VERY FEW single-family homes have gone up the last five years. What HAS gone up are townhouses, condos, and duplexes.

 

And what few single-family homes that do come on the market, DON'T sell very fast for mostly two reasons. One, the ranch-style home of the 50s and 60s, which are way too small for what people want today. Besides, they're mostly over 50 years old by now, were built cheap, and will need LOTS of repairs and upgrades.

Two, the Mcmansions that were built in the last 20 years. They're now too old and in a lot of cases, they scream MONEY, which a lot of people don't want advertised these days.  besides, they look pretty tacky now, are expensive to heat and/or cool. AND they were built on the cheap also.

Then you have taxes and upkeep, which are not cheap anymore

Aug 26, 2013 12:02PM
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Declines are overdone? No the declines are real because smart investors take profits before a tumble.
Aug 26, 2013 9:38AM
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My first thought was trailer house builders...

That way Americans could go mobile when looking for jobs...?

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