The housing market has been in the doldrums for years, and homebuilders remain unpopular among investors. But are their stocks undervalued? More specifically, is there any value in homebuilders such as KB Home (NYSE:KBH), NVR (NYSE:NVR) and Toll Brothers (NYSE:TOL).
First, a look at four indicators that show just how bad housing is:
- Millions of foreclosures. According to RealtyTrack, more than 2.3 million houses have entered foreclosure since December 2007.
- Dropping prices. According to Standard & Poor’s, house prices at the end of May were 33% below their July 2006 peak.
- Breaking ground on new houses is at a low. According to the Commerce Department, housing starts dropped 5% in August — the most since April 2011 — to a seasonally adjusted annual rate of 571,000 units.
- Housing sales are down from July 2011, lowest in six months. In August, sales of new single-family houses were down 2.3% to a seasonally adjusted annual rate of 295,000, according to the U.S. Census Bureau and the Department of Housing and Urban Development. The good news is this is 6.1% above the August 2010 level.
With all this bad news, it’s amazing that homebuilders are even adding to the supply. But all is not doom and gloom in this industry. Some are doing better than others. Here’s a breakdown of the three players mentioned above:
- NVR: Profitable, cheap stock. NVR’s revenues rose 11% to $2.7 billion in the past year, and its net income of $156 million was up 7.2%. And there’s more good news — the stock is cheap, with a price/earnings-to-growth ratio of 0.65 (where 1.0 is considered fairly valued). NVR’s P/E is 23.6 on earnings forecast to grow 36.4% to $36.15 in 2012.
- Toll Brothers: Barely profitable, cheap stock. Toll Brothers’ revenues fell 15% to $1.45 billion in the past year, and its net income of $75 million was up 100%. Although it has a slim profit margin, the stock is cheap, based on a PEG ratio of 0.48. NVR’s P/E is 32 on earnings forecast to grow 66.5% to 34 cents in fiscal 2012.
- KB Home: Unprofitable, high dividend yield. KB Home’s revenues are down 13% to $1.3 billion in the past year, during which it posted a $175 million loss. But the good news is it has a high 4.23% dividend yield. And with 42% of its outstanding shares sold short, KB Home is the fifth-most heavily shorted stock on the NYSE, according to Bloomberg. This suggests KB Home’s stock could drop, which would raise its dividend yield — if the company can keep paying a dividend.
If NVR achieves its expected 2012 profit growth, this solid company is looking awfully inexpensive. Toll Brothers has very slim profits, and its contracting sales concern me. And KB Home’s high short interest would scare me away from buying its shares.
Peter Cohan has no financial interest in the securities mentioned.
