The country’s largest homebuilders have been improving a little in the first quarter, and that improvement is expected to increase in the second half of the year. D.R. Horton Inc. (NYSE: DHI), PulteGroup Inc. (NYSE: PHM), Lennar Corp. (NYSE: LEN), Hovnanian Enterprises Inc. (NYSE: HOV), Toll Brothers Inc. (NYSE: TOL), NVR Inc. (NYSE: NVR), KB Home (NYSE: KBH) and other builders still face headwinds from falling prices as distressed sales continue.

Last week’s report from the National Association of Realtors indicated that existing inventories have continued to decline, a good sign for homebuilders. There has been a large increase in sales of existing homes to investors and private equity firms who plan to rent out the homes to all those new households. As the inventory declines, prices could begin to rise again, until those homeowners who want to sell finally see their chance (call it ‘pent-up supply’).

D.R. Horton, which released its quarterly results today, posted better than expected EPS and revenue, with EPS coming in a $0.13 on total revenue of $935.6 million. The consensus estimates had called for EPS of $0.04 on revenue of $853.4 million. Horton’s sales, closings, and backlog all finished the quarter with double-digit growth year-over-year. That’s fine, of course, but the market for new houses in the first quarter of last year was pretty awful, so that puts some perspective on this year’s spurt.

Here’s a quick look at the other builders and their most recent reports and expectations for the next quarter.

PulteGroup Inc. (NYSE: PHM) is scheduled to report earnings on Thursday. The consensus estimate calls for an EPS loss of -$0.03 on sales of $836.6 million. In the same period a year ago the company posted an EPS loss of -$0.10. PulteGroup is currently expected to post EPS of $0.04 in its June quarter and full-year EPS of $0.22, with about half that expected in the third quarter. The company’s shares are up nearly 33% since January and up 7.6% for the last 12 months.

Lennar Corp. (NYSE: LEN) posted EPS of $0.08 for its quarter ended in February, double the consensus estimate. For the quarter ending in May, the company is expected to put up EPS of $0.17 on revenue of $883.8 million, and for the full year, EPS is forecast at $0.83. PulteGroup’s shares are up about 31% since the beginning of the year and up more than 36% in the past year.

Hovnanian Enterprises Inc. (NYSE: HOV) has had a rough few years. In its most recent quarter, the company posted an EPS loss of -17% and the consensus estimate for the quarter ending in April is for an EPS loss of -$0.32. For the full-year the company is expected to post an EPS loss of -$1.02. Year-to-date shares are up about 37%, but for the past 12 months shares have lost nearly -44%.

Toll Brothers Inc. (NYSE: TOL) posted an EPS loss of -$0.02 in its January quarter, but the consensus estimate for the April quarter calls for EPS of $0.03. For the full-year, the forecast is for EPS of $0.33, with about half of that coming in the company’s fourth quarter. Year-to-date and for the past 12 months Toll Brothers is up about 17%.

NVR Inc. (NYSE: NVR) reported first quarter EPS of $3.90 last week, below the consensus estimate of $4.16. For the June quarter the company is expected to show EPS of $8.80 and for the full year EPS is expected to come in at $33.87. NVR’s shares are up about 12.8% since the beginning of the year, and for the past 12 months shares are up 6.7%.

KB Home (NYSE: KBH) reported an EPS loss of -$0.59 in its first quarter, about 2.5x the consensus estimate. For the May quarter the EPS loss is estimated to be -$0.33, an improvement of nearly 60% from the same period a year ago. KB Home’s shares are up 16.8% year-to-date, but off more than -31% in the past 12 months.

D.R. Horton opened up 1.5% this morning, at $15.61 in a 52-week range of $8.03-$16.45.

The S&P Homebuilders ETF (AMEX: XHB) opened lower this morning at $20.23 in a 52-week range of $12.22-$21.98.

Paul Ausick

Among the six homebuilders, only NVR had a significant jump in its target price since mid-October. The median target price for NVR is now $765, up from $728, and the stock price as of about noon today is $682.57, for an upside potential of 12.1%. That’s not a grand number, but it’s the best in the sector. Target prices for PulteGroup, D.R. Horton, Hovnanian, and Beazer did not change and the target price for Toll Brothers rose just $0.15, from $21.50 to $21.65. Not a big display of confidence in the sector.

Home Depot’s median target price rose from $40.00 to $42.00, and the stock’s current price of $40.51 implies a potential gain of 3.7%. Lowe’s median target price rose from $23.00 to $26.00, and at the current price of $25.13 the implied gain is 3.5%. Even though now is not a particularly good season for home improvement projects, either one or both of these stores could easily push through the new targets.

While the target prices did not change for five of the homebuilders, all but NVR saw share price gains of more than 30% in the last six weeks, with PulteGroup shares gaining 51%. Home Depot and Lowe’s shares are up 16% and 19%, respectively, in the same period. These share price rises for homebuilders indicate more investor interest in these stocks, analysts’ lack of enthusiasm indicates that caution remains the best policy.

None of these builders pays a dividend, with the exception of Beazer which offers investors a dividend yield of 1.2%. Home Depot’s dividend yield is 2.9%, and Lowe’s offers a dividend yield of 2.3%.

For investors who believe they have to participate in this sector, Home Depot remains the best choice, with Lowe’s the best alternative. Building — and selling — new houses is still a risky business.

Paul Ausick

Worse, there is not much expectation that the market will turn around, at least until 2013. More foreclosed homes coming on the market will continue to depress prices, and until inventories of unsold homes are cleared, there simply cannot be a significant recovery. The homebuilders we are looking at include NVR (NYSE: NVR), Toll Brothers (NYSE: TOL), PulteGroup (NYSE: PHM), Hovnanian Enterprises (NYSE: HOV), D.R. Horton (NYSE: DHI) and Beazer Homes USA (NYSE: BZH).

Home improvement stores have also had to struggle over the past several years. Shares of Home Depot (NYSE: HD) and Lowe’s Companies (NYSE: LOW) are both lower today than they were five years ago.

Share prices were pegged at about noon today, and all data comes from Yahoo! Finance.

NVR has a median target price of $728.00 from four brokers. Shares are trading today at $620.99, for an implied gain of $107.01, or 14.7%. NVR’s forward P/E is 17.6 and the company does not pay a dividend. The stock’s 52-week trading range is $554.71 to $804.31, and at today’s price that is about 12% above its 52-week low and 23% below the 52-week high. NVR’s share price has risen about 12% since October 2006, and of all the homebuilders, it is the only one that can point to a gain over that period. The company’s consensus EPS estimate for 2011 has dropped from $28.02 to $26.45. There might be an opportunity here, but it is a pretty slim one.

Toll Brothers has a median target price of $21.50 from 14 brokers. Shares are trading today at $15.29, for an implied gain of $6.21, or 28.9%. Its forward P/E is 49.35 and the company does not pay a dividend. The stock’s 52-week trading range is $13.16 to $22.42, and at today’s price that is about 16% above its 52-week low and 32% below the 52-week high. Toll Brothers is expected to post EPS of $0.20 for its 2011 fiscal year ending this month — and that is up from an earlier EPS estimate of just $0.02. The company’s position at the luxury end of the market has been something of a prop to the share price, but the U.S. economy is not minting many new millionaires right now.

PulteGroup has a median target price of $6.50 from 15 brokers. Shares are trading today at $4.14, for an implied gain of $2.36, or 36.3%. PulteGroup’s forward P/E is 32 and the company does not pay a dividend. The stock’s 52-week trading range is $3.29 to $8.69, and at today’s price that is about 26% above its 52-week low and 52% below the 52-week high. PulteGroup was one of the 10 worst performing stocks in the recently completed quarter, losing 45% of its value. There is nothing about the homebuilding industry or PulteGroup’s recent performance that justifies the forward P/E ratio of 32. Hope is not a strategy.

Hovnanian Enterprises has a median target price of $1.38 from eight brokers. Shares are trading today at $1.20, for an implied gain of $0.18, or 13%. Hovnanian’s forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $0.89 to $5.00, and at today’s price that is about 35% above its 52-week low and 76% below the 52-week high. Hovnanian is asking debt holders to exchange old notes for new ones carrying a lower interest rate and a longer term. The offer is scheduled to end next week. The company’s corporate debt rating is CC, just two notches above default. Debt holders are unlikely to ride to the company’s rescue.

D.R. Horton has a median target price of $13.00 from 14 brokers. Shares are trading today at $9.62, for an implied gain of $3.38, or 26%. Horton’s forward P/E is 19.3 and the company pays a dividend yield of 1.5%. The stock’s 52-week trading range is $8.03 to $13.50, and at today’s price that is about 59% above its 52-week low and 29% below the 52-week high. Horton is expected to post EPS for the quarter just ended of $0.14, and full-year EPS of $0.20 for the year ended in September. The consensus estimate for 2012 full-year EPS is $0.50. If the market is getting weaker, as many believe, the company has exactly no chance of meeting that 2012 number.

Beazer Homes USA has a median target price of $3.00 from seven brokers. Shares are trading today at $1.81, for an implied gain of $1.19, or 39.7%. Its forward P/E is negative and the company does not pay a dividend. The stock’s 52-week trading range is $1.35 to $6.23, and at today’s price that is about 12% above its 52-week low and 81% below the 52-week high. Beazer’s biggest trouble is that it is a builder of entry-level homes, the sector that is hardest hit by the number of foreclosed properties coming on the market. One thing that could help Beazer a little is that home owners have begun taking their houses off the market because they are unwilling to sell for the current low prices. Inventory is still high, but it was lower in September than in August.

Home Depot has a median target price of $40.00 from 22 brokers. Shares are trading today at $34.97, for an implied gain of $5.03, or 12.6%. Home Depot’s forward P/E is 13.14 and the company pays a dividend yield of 2.9%. The stock’s 52-week trading range is $28.13 to $39.38, and at today’s price that is about 24% above its 52-week low and 11% below the 52-week high. Research firm BuildFax reports thats home remodeling projects increased by 29% in August compared with August 2010. The firm attributes the increase to refinancing of existing homes at current low interest rates. With the peak remodeling season behind us for another year, this growth could begin to slow down.

Lowe’s Companies has a median target price of $23.00 from 20 brokers. Shares are trading today at $21.09, for an implied gain of $1.91, or 8.3%. Its forward P/E is 11.93 and the company pays a dividend yield of 2.7%. The stock’s 52-week trading range is $18.07 to $27.45, and at today’s price that is about 17% above its 52-week low and 23% below the 52-week high. Lowe’s announced this morning that it was closing another 20 stores across the U.S. and expects to take a charge of $0.17 to $0.20 against second-quarter EPS. About 1,950 employees will lose their jobs. Lowe’s performance has been weaker than Home Depot’s for a couple of years now, and this year the share price is about flat, compared with Home Depot’s share price gain of 15%.

Paul Ausick

According to today’s report, the seasonally adjusted annual rate of sales of new single-family homes in August is -2.3% lower than in July, but 6.1% higher than August 2010.  The number of new homes sold in August 2011 was 295,000 new homes, compared with 278,000 in August 2010. That’s okay, except August 2010 monthly sales were the lowest on record. Pretty weak.

Last week both KB Home (NYSE: KBH) and Lennar Corp. (NYSE: LEN) reported weak earnings. KB did note a jump of 40% in new orders, once again a hopeful sign until compared with the same period last year which couldn’t have been much worse. Other homebuilders PulteGroup, Inc. (NYSE: PHM), D.R. Horton, Inc. (NYSE: DHI), Toll Brothers Inc. (NYSE: TOL), NVR Corp. (NYSE: NVR), and Beazer Homes USA Inc. (NYSE: BZH) have all struggled during the past twelve months, with only NVR showing a share price drop of less than -10%. This is not an industry on the mend.

The Commerce Department also estimates that the US housing inventory increased slightly in August to a 6.6 month supply at the current sales rate. Of that, the Department estimates that 60,000 new homes are completed and ready for sale and another 77,000 are under construction. Another 27,000 are permitted but construction has not yet begun. The total inventory at the end of July was 163,000 houses with 26,000 sold in August. At the end of August, 164,000 new houses were for sale. That’s not an improvement.

The best thing to be said for new home sales is that they are not getting worse even though the absolute numbers are very low. If this data indicates a recovery or any sign of better days ahead for homebuilders, then one is looking at the numbers through rose-colored lenses.

Shares of KB Hoe are down more than -6% in the early afternoon, at $5.55, in a 52-week range of $5.09-$16.11.  Lennar shares are down about -1.5%, at $13.20, in a 52-week range of $12.39-$21.54. Pulte shares are down nearly -2%, at $3.97 in a 52-week range of $3.40-$8.99. The other builders are also trading lower, and the SPDR S&P Homebuilders ETF (NYSE: XHB) is up a fraction at $13.45, in a 52-week range of $13.02-$19.21.

Paul Ausick

According to online foreclosure tracker RealtyTrac, foreclosure filings topped 228,000 in August, a 7% jump over July filings.  One in every 570 US housing units is now in foreclosure. This puts even more pressure on new homebuilders like Toll Brothers Inc. (NYSE: TOL), D.R. Horton Inc. (NYSE: DHI), NVR Inc. (NYSE: NVR), Lennar Corp. (NYSE: LEN), PulteGroup, Inc. (NYSE: PHM), M/I Homes Inc. (NYSE: MHO), Ryland Group, Inc. (NYSE: RYL) and Beazer Homes USA Inc. (NYSE: BZH).

The builders have managed to stay afloat by cutting costs and shedding real estate and a myriad of other financial finagling, but they’re not making money building houses. And the more houses that are foreclosed, the weaker that housing prices get as banks are willing to take just about any reasonable offer to get rid of the foreclosed properties they own.

New default notices in August totaled nearly 79,000, up 33% since July and the largest one-month increase since August 2007. The peak month for notices of default was April 2009, when more than 142,000 notices were filed.

The well-publicized robo-signing issue and other documentation problems are finally being settled and there is plenty of reason to believe that more foreclosures will begin to work their way through the system. Freddie Mac has said that it expects the delay in filing foreclosures to last through the end of this year, but the August report could signal that the move is already on.

Just a month ago ratings on NVR, PulteGroup, M/I Homes, Ryland, D.R. Horton, and Beazer were raised at one research firm from ‘Sector Perform’ to ‘Outperform’. It’s difficult to understand why. What’s not difficult to understand is that the shares in these firms all jumped  by about 20%. Since then most of the companies have given it all back as reality takes over.

Lennar, which reports earnings on Monday, is expected to post EPS of $0.10 on sales of $810.2 million. Last year’s EPS in the same period was $0.16 and revenues totaled $825 million. The stock’s target price is $21.81 and it closed at $13.72 yesterday, an implied upside of nearly 60%. Anyone who believes that probably believes in the tooth fairy.

Paul Ausick

For the quarter, Toll Brothers sold 693 units, down from 803 in the same period a year ago. Contracts increased slightly year-over-year, from 701 in 2010 to 713. Backlog also increased, from 1,636 units in the same period a year ago to 1,780. Toll Brothers builds higher-priced homes and has been somewhat insulated from the turmoil at the lower-priced end of the market. However market volatility in the last few weeks could cause the company some more problems going forward.

Toll Brothers was not among six builders that received ratings upgrades earlier this month. NVR Inc. (NYSE: NVR), PulteGroup, Inc. (NYSE: PHM), M/I Homes, Inc. (NYSE: MHO), Ryland Group, Inc. (NYSE: RYL), D.R. Horton Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH).

The number of foreclosed homes either on the market or in the line to come onto the market remains very high. There has been a delay in processing foreclosures, and once that delay ends, the number of foreclosed homes is expected to jump again. Pricing pressure on new homes will follow.

The sort-of good news for the homebuilders is that this flow of foreclosures is not expected to hit the market until 2012. That’s some help to the builders for the rest of this year, but not much.

Toll Brothers guided deliveries for the full fiscal year at 2,475-2,675 homes, compared with an earlier estimate of 2,300-2,800. The company’s first estimate for new home sales was 2,100-2,900. In the 2010 fiscal year, Toll Brothers sold 2,642 units, a drop of -11% from 2009.

The market for new houses is weak, and there is really no good reason for optimism. A slow-growth economy combined with high unemployment and an abundance of foreclosed properties don’t forecast a sunny outlook for the homebuilders going into 2012.

Shares of Toll Brothers are up about 0.4% in the pre-market this morning, at $14.80. After posting a new 52-week low yesterday, the stock’s 52-week range is $14.59-$22.42. To indicate the abiding hope for the housing market, Toll Brothers trailing P/E ratio is nearly 41. The SPDR S&P Homebuilders ETF (NYSE: XHB) closed yesterday at $13.49, near the bottom of its 52-week range of $13.05-$19.21.

Paul Ausick

The Mortgage Bankers Association reported this morning that applications for mortgages rose nearly 22% in the past week.  Refinancings jumped 30%, while purchase applications fell by nearly -1%. The news comes the day after one analyst firm lifted ratings on three builders from ‘Sector Perform’ to ‘Outperform’. The three were NVR Inc.(NYSE: NVR), PulteGroup, Inc. (NYSE: PHM), and M/I Homes, Inc. (NYSE: MHO). Three other builders received similar upgrades on Monday: Ryland Group, Inc. (NYSE: RYL), D.R. Horton Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH).

The lone winner, not the ‘loan winner,’ may be Stewart Information Services Corp. (NYSE: STC).  All that matters for them is volume rather than if it is a refinance or a purchase.

Beazer reported its third-fiscal quarter earnings yesterday and badly missed already low expectations. The company reported an EPS loss of -$0.80, compared with an expectation of an EPS loss of -$0.42. Revenue of $172.8 million missed expectations of $232 million. Shares posted a new 52-week low of $1.69, and closed at $1.83. Ryland posted a new yearly low yesterday as did all the others we’ve noted.

A big part of the problem the builders face is the number of existing homes available for sale and the number of bank-owned homes, called REOs for “real-estate owned”, also on the market. In June a record number of REOs were sold and the inventory of REOs fell significantly. That should be good news for builders.

Alas, the good news must be tempered with the knowledge that 90-day delinquent loans and loans in foreclosure have been getting processed more slowly. Foreclosure proceedings have been delayed by process issues, changes in state foreclosure laws, and court rulings that have to be applied to existing foreclosures.

Freddie Mac expects the delays in foreclosures to continue through the rest of 2011. As a result, REO inventory is very likely to continue to decline, giving a false picture of the true level of delinquent and foreclosed properties. As that inventory falls, the instinctive response is that new building will increase.

While that may happen, far likelier is that the bottleneck on foreclosures will finally open and the REO inventory will jump again. New home building will come under pressure again as builders are forced to compete with foreclosed properties now up for sale at distressed prices.

With the S&P down by nearly -3% this morning, Beazer and PulteGroup are down more than twice that amount. Beazer shares have posted another new low today, at $1.68. The SPDR S&P Homebuilders ETF (NYSE: XHB) is down about -3.5%, at $13.64, just inside the 52-week range of $13.15-$19.21.

Paul Ausick

DR Horton Inc. (DHI)….. $3.5B; +5.8% at $10.78
Toll Brothers Inc. (TOL). $3.1B; +4.5% at $18.86
NVR Inc. (NVR)……….. $2.6B; +4% at $6.86
MDC Holdings Inc. (MDC).. $1.5B; +4.5% at $30.95
Lennar Corp. (LEN)……. $1.2B; +11% at $7.98
KB Home (KBH)………… $1.1B; +6% at $14.30
Ryland Group Inc. (RYL).. $728.8M; +6% at $16.80
Meritage Homes Corp(MTH). $401.3M; +7.3% at $12.99
Hovnanian (HOV)………. $125.0M; +11% at $1.72
M/I Homes, Inc. (MHO)…. $121.7M; +2.2% at $8.72
Standard Pacific (SPF)… $100.6M; +11% at $1.00

Oddly enough, the SPDR S&P Homebuilders (NYSE: XHB) ETF is only up almost 4% at $11.37.  The other ETF, the iShares Dow Jones US Home Construction (NYSE: ITB) is up 3.5% at $9.25.  This is a slightly different ETF, but the PowerShares Dynamic Building & Construct (NYSE: PKB) is up 1.3% at $9.65 on very thin volume.

JON C. OGG

• Centex (NYSE: CTX), DR Horton (NYSE: DHI), and KB Home (NYSE: KBH) were all started with "Outperform" ratings.
• MDC Holdings (NYSE: MDC) and NVR (NYSE: NVR) were both started as Neutral.
• Hovnanian (NYSE: HOV) and Meritage Homes (NYSE: MTH) were started as "Underperform."

We’ll follow up if we see any of the other calls in the sector out of Credit Suisse.
Jon C. Ogg
June 24, 2008

What we wanted to do was show a list of the old major homebuilders to show how the stocks have sold off over the last year and even how low the market caps have become in the sector.  Dubai has signaled it wants to buy into a homebuilder, and that was before Abu Dhabi injected $7.5 Billion into Citigroup.

Measuring stock price alone is no way to judge, but looking at the sell-offs from the recent highs may be a judge.  Some are down more than 80% from their 52-week highs.

Tick    PRICE        CHANGE            $52-WEEK      MKT-CAP
DHI    $10.23    (-$0.35; -3.31%)  $10.46-31.13     $3.22B   
TOL    $18.12    (-$0.01; -0.06%)  $18.12-35.64     $2.84B   
LEN    $14.08    (-$0.42; -2.90%)  $14.50-56.54     $2.26B   
PHM    $8.92    (-$0.24; -2.62%)   $9.00-35.56        $2.28B   
CTX    $17.93    (-$0.45; -2.45%)  $18.34-58.42      $2.18B   
NVR    $442.59 (+$8.59; +1.98%) $398.96-851.96  $2.27B   
KBH    $18.65    (-$1.00; -5.09%)  $19.61-56.08      $1.92B   
MDC    $32.15   (-$0.40; -1.23%)   $32.49-60.34      $1.47B   
RYL    $19.76    (-$0.26; -1.30%)   $19.97-60.13      $831.58M   
HOV    $6.95      (+0.02; +0.29%)    $6.92-38.66        $432.32M   
BZH    $7.12      (+0.15; -2.06%)      $7.06-48.60        $279.16M

We aren’t going to make a determination yet as to which ones will live and which ones will bite the dust.  Unfortunately you can’t even trust the balance sheets right now because there is simply no way to calculate the off-book transactions, the value writedowns that each will fess up to, and how many of these homes that were juiced-up and sold above market with rebates and incentives that some of the builders will ultimately have to take back at some point in the future.

At least one or some will likely fail.  History would dictate that some cannot survive the malaise if it continues at this rate.  Ultimately, some will thrive after this dust storm settles.  But "ultimately" can be a long ways off.

If you noticed the news this morning you saw a 4.5% decrease in housing prices in Q3 2007 over Q3 2006, and that was after a 2.2% decrease in Q2.  There is no price rebound expected in 2008, and foreclosures are expected to rise as well.

The SPDR S&P Homebuilders ETF (AMEX:XHB) shares are down 0.8% at $17.05 late in the day.

DR Horton (DHI), Toll Brothers (TOL), Lennar (LEN),Pulte (PHM), Centex (CTX), NVR Inc. (NVR), MDC Holdings (MDC), Ryland (RYL), Hovnanian (HOV), Beazer (BZH)……

Jon C. Ogg
November 27, 2008

24/7 Wall St. has an open email distribution list with other similar briefs and stories where we summarize and preview data for those interested.  It is usually sent out two to three times per week.