LEN, KBH Earnings Were Killer — But Proceed With Caution

Rising interest rates could be trouble down the road

   

Despite recent upticks in the mortgage interest rates, homebuilder stocks Lennar (LEN) and KB Home (KBH) both reported stellar earnings Tuesday morning, beating analyst estimates handily.

KB Home said third-quarter net income was $27.3 million, or 30 cents a share — a huge jump from the year ago period’s 4 cents per share and 8 cents better than analyst expectations.

Closed sales income for KBH rose 29% year-over-year to $549 million. Plus, the overall average selling price was up 22%, making for the 13th consecutive quarter of year-over-year price gains for the homebuilder.

KB Home CEO Jeffrey Mezger cited improving fundamentals in the housing recovery, and added that recent mortgage interest rate hikes, which have recently slowed the recovery, are likely to be just a “temporary effect.”  He continues to see upward housing demand for KBH thank so an improving economy and positive demographic trends.

Lennar, which I recently called one of the stronger homebuilder stocks to buy, also posted better-than-expected results. Net quarterly earnings for Lennar Homes totaled $120.7 million, or 54 cents per share — up 35% from 40 cents per share a year ago and better than the 45 cents analysts had slated. LEN’s revenue rose 46% to $1.6 billion, also topping estimates.

Orders for new homes and the backlog of unfinished homes increased for LEN. The homebuilder also posted a 16% increase in the average sales price, and a 32% increase in the number of homes on order. Stuart Miller, Lennar’s CEO, said he was “very pleased with our quarterly results.”

So how should you play LEN and KBH in the face of these impressive earnings reports?

Well, after a long four-month downturn from $44 to $31, Lennar bounced back to near $38 this month, before pulling back close to the 50-day moving average at $33.69. But the solid earnings report blasted LEN up 4.26% on Tuesday, closing at $36.01 on 12.8 million shares.

Further upside is the norm in the days ahead after such a significant move, but resistance will probably be met at the 200-day moving average of  $38.17 — as seen in the LEN chart below.

LEN LEN, KBH Earnings Were Killer    But Proceed With Caution
Chart Courtesy of stockcharts.com

KB Home was equally as strong on Tuesday, also up over 4.2% to close at $17.76. KBH stock has recently dropped 36% from $25 to $16, so it was considerably oversold and due for a strong bounce on any good news. Going forward, KBH also looks to trend higher, and should test the 200-day moving average some 7% higher at $19.11.

Beyond that, it is difficult to say where LEN and KBH could go. Despite Mr. Mezger’s positive spin of interest rate hikes as “temporary,” more upside in interest rates is almost a certainty being built into the real estate market right now.

Even if orders continue at the current strong pace, it is unlikely that homebuilders such as Lennar Homes and KB Home will be able to continue raising prices. On a $200,000 home, there is about a $120 difference in the payment between a 30-year fixed mortgage at 5% and one at 6%.

With tighter lending standards and new fees coming along all the time, borrowers find it much more difficult to get approved when interest rates rise.

Therefore, if you are long LEN or KBH, enjoy the ride for awhile … but keep your eyes open to any changes in the mortgage market over the next quarter.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/09/len-kbh-kill-on-earnings-but-buy-homebuilders-stocks-cautiously/.

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