Homebuilder Confidence Remains Positive, and Homebuilder Stocks Look Stronger

November 18, 2013 by Paul Ausick

construction
Source: Thinkstock
The National Association of Home Builders (NAHB)/Wells Fargo housing market index for November was flat with a downwardly revised reading of 54 in October. The reading was lower than a forecast of 55 from Bloomberg. An index reading above 50 indicates that more builders view sales conditions as good than view them as poor.

The current sales conditions sub-index also remained steady in November in at 58, and the sales expectations index came in at 60, down one point. The sub-index that estimates prospective buyer traffic also fell one point to come in at 42.

The NAHB chairman noted:

Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road. Meanwhile, builders continue to face challenges related to rising construction costs and low appraisals

Research and investment firm Sterne Agee has a significantly brighter take on the market for new homes. Last week the firm pointed out that mortgage rates are lower than they were in July and that trend is expected to continue. Mortgage lending standards are expected to be eased somewhat, and consensus estimates of earnings per share for several homebuilders have fallen by an average of 17% since reaching a peak in May. Here are a few homebuilders on which the firm places a Buy rating.

D.R. Horton Inc. (NYSE: DHI) has a market cap of $6.31 billion, and the stock closed Friday night at $19.59, in a 52-week range of $17.52 to $27.75. The consensus price target from Thomson/First Call is around $23.70, indicating an implied gain of about 21%. The company met EPS estimates in its second fiscal quarter after handily beating them for the prior three quarters.

Meritage Homes Corp. (NYSE: MTH) has a market cap of $1.56 billion. The stock closed at $42.74 last Friday, in a 52-week range of $32.33 to $52.95. The consensus price target is $51.00, which indicates an implied gain of about 19%. Meritage has easily beaten EPS in each of the past four quarters.

PulteGroup Inc. (NYSE: PHM) has a market cap of $7.02 billion, and the stock closed Friday night at $18.10, in a 52-week range of $14.23 to $24.47. The consensus price target on the stock is $20.00, yielding a potential upside of 10.5%. PulteGroup has bested EPS estimates in three of the past four quarters.

We have looked at home improvement companies Home Depot Inc. (NYSE: HD) and Lowe’s Companies Inc. (NYSE: LOW) earlier this morning. Both report earnings this week, and both have posted good results for the past few quarters.