With existing and new home sales down dramatically this week, you’d expect homebuilder stocks such as Toll Brothers (NYSE: TOL), KB Home (NYSE: KBH), Pulte Group (NYSE: PHM), as well as stocks in building materials makers and home improvement retailers, to see similar declines. You’d be wrong.
It appears investors are yet again willing to bet that the housing market is finally at rock bottom, since these stocks are actually up. The S&P SPDR Homebuilders (XHB) exchange traded fund, which holds builders such as KB Home and PulteGroup along with materials makers and home improvement retailers, rose +1.5%, with the housing news while the Dow fell 147 points, or -1.4%. Homebuilder Toll Brothers actually rose +5.8% in Tuesday trading.
It’s an odd trend that shows consumer confidence – while seemingly low in other areas – remains optimistic when it comes to housing futures. Despite all evidence to the contrary, investors want to believe.
But with existing home sales sinking -27.2% (twice as much as expected) and new home sales falling -12.4% in July, this could prove a false hope for investors. Much of that drop is attributed to the end of the homebuyer tax credit. And there’s nothing coming in the near future to help prop up numbers. Meaning without additional government aid, analysts are betting those numbers could get worse.
Still, it may pay to buy at the bottom of these builders. Here are the five major home building companies and their current average price targets to help make sense of the sector:
Toll Brothers (TOL): A Horsham, Penn.- based luxury homes builder formed in 1967, Toll Brothers (NYSE: TOL) operates in 20 states and is a Fortune 1000 company. The luxury home builder on Wednesday reported fiscal third-quarter earnings of $27.3 million, or 16 cents a share, beating estimates. The shares reacted positively, gaining 5.81% to $17.13. But TOL may not be headed down with the current economic news. Because Toll has a 90-day building cycle versus the industry one-month average, any slowdown may not show until coming quarters. Wall Street notes an average price target of $22, according to Thomson/First Call, some +28% above the price. Toll Brothers is down -8.92% year-to-date, below the -3.52% for the Dow Jones and -5.36% for the S&P 500 year-to-date numbers.
D.R. Horton, Inc. (DHI): Headquartered in Fort Worth, Texas, D.R. Horton (NYSE: DHI) is one of the largest homebuilders in the United States, a record it touts since 2002. It builds single-family homes in 26 states and employs 3,000 workers. To date, there is bearish speculation for the stock, as shares of DHI hit the 50-day moving average from below but didn’t surpass the industry-watched resistance line. According to Thomson/First Call, DHI has an average Wall Street price target of about $13, about +24% above current pricing. DHI stands at -4.04% over last year, compared to the -3.52% for the Dow and -5.36% for the S&P.
PulteGroup, Inc. (PHM): PluteGroup (NYSE: PHM), which owns Pulte Homes, is a Bloomfield, Mich.-based company that acquired Centex a little over a year ago — creating the nation’s largest homebuilding company in a stock transaction worth $3.1 billion, though that included $1.8 billion of debt. PHM is trading below the 50-day moving average and lower than the 200-day moving average. The stock is listed as having an average price target of about $12 a share, according to Thomson/First Call, about +48% above the current $8.08 pricing for the stock. PHM is down -19.19% year-to-date, far below the -3.52% for the Dow Jones and -5.36% for the S&P 500 year-to-date numbers.
Lennar Corp. (LEN): Lennar Corp. (NYSE: LEN) is a Fortune 500 company based in Miami, Fla, and operates in 17 different states throughout the U.S. While some builders saw price upticks, LEN isn’t fairing remarkably well. Shares underperformed the broader S&P 500 Index by -20% during the past 60 sessions. Since April, LEN has been falling, though did rise +3.49% in yesterday’s trading. LEN has an average price target of $20 according to Thomson/First Call. That’s roughly +49% above the current price of the stock, at $13.35. Unlike its competitors, LEN is up +4.5% against the Dow Jones and S&P 500.
KB Home (KBH): A homebuilding company founded in 1957 as Kaufman & Broad in Detroit, Mich., KB Home (NYSE: KBH) was the first company to be traded on the NYSE as a home builder. Today its headquarters are in Los Angeles. In fiscal year 2008, the company delivered 12,438 homes in the United States and had revenue of over $3 billion. These days the numbers are bleaker, down more than $9 billion in revenue since the booming days of housing in 2005. Its stock, too, has seen better days. KBH is trending lower since peaking above $20 in April, now at around $11. Thomson/First Call lists the price target of the stock at about $16, about +52% above the average price target of the stock. KBH is down -23.55% compared to the -3.52% for the Dow Jones and -5.36% for the S&P 500.
As of this writing, Burke Speaker did not own a position in any of the stocks named here.
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