Is Housing Ahead of Itself?

Zacks

Yet for all the optimism, housing is still in a fragile recovery. Many millions of home owners have more outstanding on their mortgages than what their houses are worth. Then, with banks still shy to lend, the Federal Government and its housing agencies back the vast majority of home loans. It may be surmised that the market would quickly cease to exist without intervention from Washington, D.C. Further, the unemployment rate remains relatively high, negatively impacting home sales.

Our perusal of Zacks’ outstanding recommendations for the sector reveals that we are currently Neutral on major housing stocks pending a more broad based recovery.

Toll Brothers Inc. (TOL), the nation’s biggest luxury home builder, recently reported a series of favorable metrics, including lower proportion of cancellations, higher number of inked contracts and rising backlog. The stock price is up 50.7% year to date, compared with a 12.8% return for the S&P 500.

The third quarter 2012 adjusted earnings of PulteGroup, Inc. (PHM) of 27 cents per share beat the Zacks Consensus Estimate of 20 cents by 35% and were significantly better than adjusted earnings of 11 cents in the prior-year quarter. PulteGroup’s cost reduction and operating efficiency improvement initiatives led to the bottom-line beat in the quarter. The company’s homebuilding revenues rose 13.5% to $1.26 billion, driven by an increase in number of homes closed and higher average selling prices. We are currently Neutral on the stock. The stock is up 160.7% year to date.

KB Home’s (KBH) adjusted net loss per share of 10 cents in the fiscal third quarter (ending August) was narrower than the prior-year quarter loss of 13 cents and the Zacks Consensus Estimate of a loss of 17 cents. Top-line growth of 16% and margin expansion led to the reduced loss. KB Home believes its strategic initiatives including overhead reduction, margin expansion, and land investments in higher-priced, better-located communities, coupled with an increasing backlog, will help it achieve profitability in the fiscal fourth quarter and beyond. We are currently Neutral on the stock. The stock is up 118.7% year to date.

Earnings of $1.01 per share of The Home Depot, Inc. (HD) for fiscal second-quarter (ending July) exceeded the Zacks Consensus Estimate of 97 cents and surged over 17% from the prior-year period, on the back of healthy comps growth and effective cost management. Further, strong quarterly performance prompted management to raise fiscal 2012 earnings guidance to $2.95 per share from $2.90 forecast earlier. We are currently Neutral on the stock. The stock is up 56.7% year to date.

Lennar Corp.’s (LEN) fiscal third quarter (ending August) earnings per share of 34 cents soared 209% from the year-ago earnings banking on solid top-line and margin growth. Earnings beat the Zacks Consensus Estimate by 25.9%. Revenue climbed 34% in the quarter as Lennar benefited from pricing and volume growth. The company witnessed solid year-over-year growth in new home orders, average selling prices and home closings in all the three quarters of 2012. Margins have also been above average, despite rising costs, driven by strong operating leverage. Lennar appears to be well positioned for growth for the rest of the fiscal year. We are currently Neutral on Lennar. The stock is up 87.8% year to date.

Lingering memories of the housing boom and bust make us view the attractiveness of the housing sector with caution. On the other hand, we believe that the above-mentioned surviving companies of the downturn may be well placed to benefit from a more sustained recovery.

Read the Full Research Report on HD

Read the Full Research Report on PHM

Read the Full Research Report on LEN

Read the Full Research Report on TOL

Read the Full Research Report on KBH

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