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2 Homebuilders Soar Despite Sales Slowdown in Fiscal 2018

- By James Li

On Wednesday, two homebuilders soared on earnings that outperformed those of the prior-year quarter: Lennar Corp. (LEN) and KB Home (KBH).

For the quarter ending Nov. 30, 2018, Miami-based Lennar reported net income of $791.6 million, or $2.42 in earnings per share, compared to net income of $309.6 million, or earnings of $1.29 per share, in the prior-year quarter. Likewise, Los Angeles-based KB Home reported net income of $96.8 million, up 15% from the prior-year quarter.


Sales decline on housing market headwinds

The homebuilding industry includes companies engaged in the construction of single-family and multi-family residential homes. Figure 1 shows a pie chart illustrating the top homebuilders in the U.S.

Figure 1

Major homebuilder D. R. Horton Inc. (DHI) said in its Nov. 16, 2018 annual report that key risks for homebuilders include the cyclical nature of the industry: Changes in economic, real estate or other factors can "adversely" affect homebuilders' business and results. Key economic indicators for the homebuilding industry include the number of housing starts and number of houses sold.

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Lennar Executive Chairman Stuart Miller said sales declined primarily due to higher home prices and reducing mortgage rates, which was consistent with management's commentary from the third-quarter conference call. The chairman said management is "deferring guidance" for fiscal 2019 due to "the continued softness and uncertainty" of the housing market.

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Rival homebuilder KB Home said revenues for the quarter were $1.35 billion, down 4% from the prior-year quarter.

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Stocks rise on strong earnings, company profitability stays strong

Despite the sales slowdown, Lennar traded at an intraday high of $47.17, up approximately 9.98% from the previous close of $42.89 as earnings increased approximately 87.6% year over year. Likewise, KB Home increased a further 4% in aftermarket trading following a 4% rise during the day.

GuruFocus ranks Lennar's profitability 8 out of 10 on several positive signs, which include expanding profit margins, a solid Piotroski F-score of 6 and a three-year revenue growth rate that outperforms 85% of global competitors. Gurus riding Lennar's momentum include Glenn Greenberg (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio). Third Avenue Management (Trades, Portfolio) also slightly boosted its position in Lennar during the quarter.

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Disclosure: No positions.

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This article first appeared on GuruFocus.