“No one is discounting the amount of time it will take to hit mid-cycle earnings. They’re trading at a 60 percent premium to mid-cycle, and everyone’s chasing these things right now,” says Will Randow, a Citi group analyst who has an underperform on Lennar.
Others, however disagree. “There should be little doubt this builder is driving its homebuilding operations faster than most of its peers,” writes ISI’s Stephen East in a client note. “Lennar sports a premium valuation, these results justify that position, as issues that matter most to us, including order rates, gross margin and SG&A, are all near the top of the group.” (Read More:Home Builders Bullish for Fifth Straight Month)
The builders are racing to meet new demand, but they are still building at less than half the historical averages. Single family housing starts were at a seasonally adjusted annual rate of 535 thousand units in August. Yes, that’s up from 418,000 in 2011, but nowhere near the 1.3 million average rate around the beginning of the last decade.
Another issue is land. Some of the builders, like Toll Bros. (TOL) are well positioned to take advantage of a swift recovery, but others are not. Land prices are rising, especially for finished lots in prime locations. The cost of materials is also high, and in some areas labor is tight, pushing costs up there as well.
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US Home Builders
- Toll Brothers
- DR Horton
- Hovnanian Enterprises
- Ryland Group
- Lennar Corp
- Beazer Homes USA
- Meritage Homes
- KB Home
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