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Zacks Industry Outlook Highlights: Lennar, D.R. Horton, PulteGroup, KB Home and Toll Brothers

For Immediate Release

Chicago, IL - December 01, 2015 - Today, Zacks Equity Research discusses the Homebuilding, part 1, including Lennar Corporation ( LEN ), D.R. Horton, Inc. ( DHI ), PulteGroup, Inc. ( PHM ), KB Home ( KBH ) and Toll Brothers, Inc. ( TOL ).

Industry: Homebuilding, part 1

Link: http://www.zacks.com/commentary/63646/homebuilder-industry-stock-outlook---dec-2015

Soft Housing Data Temporary: 2016 Holds Promise

2015 has generally been a good year for the housing market, possibly the best since 2007, when the housing recession set in. After a lull in the U.S. housing market in the first quarter, sales picked up in the ensuing months amid an improving economic environment and a better employment picture.

However, recent housing data has been rather soft, suggesting some weakening in the pace of housing recovery. Housing starts declined 11% in October per data released on Nov. 18, primarily due to a sharp plunge in the construction of multi-family units.

Data released by the National Association of Home Builders (NAHB) showed that homebuilders' sentiment index slipped three points to 62 in November. Existing home sales declined 3.4% in October due to supply shortages, after a September surge, per data released by the National Association of Realtors in November.

Many homebuilders talked about tight land and labor resources resulting in production constraints in the past quarter. The labor market has tightened with limited availability arresting the rapid growth in housing production.

Moreover, tough weather conditions in the first half of the year resulted in land development and related community opening delays in some markets, mainly in the U.S. South. Some homebuilders also complained of a slight slowdown in sales in the Texas/Houston region -- mainly at higher price points -- due to low oil prices and a resultant economic slowdown.

Nevertheless, the overall fundamentals of the all-important construction sector remain strong and the soft data in November is seen by the market as only a temporary setback. As it is, the fourth quarter is seasonally the slowest for construction activity due to harsh weather.

Importantly, new home sales rose 10.7% in October, rebounding strongly from the steep drop in September. Building permits -- a gauge of future constructions -- rose 4.1% in October, an indication that construction activity might pick up in November. Moreover, U.S. construction spending touched its highest level in more than seven years in September, gaining 0.6%.

Higher job numbers, a recovering economy and improving consumer confidence, moderating home price gains, affordable interest/mortgage rates, rising rentals, rapidly rising household formation and a limited supply of inventory all point to continued strong demand momentum in 2016.

With stabilizing demand, housing price gains are also moderating. Moreover, housing remained an affordable option in 2015 as mortgage rates are below historical levels. The mortgage rates may rise in case the Fed announces a hike in the Federal fund rate next month. Even if we suppose an accompanying rise in mortgage rates with an interest rate hike, we believe they should still remain reasonable, keeping housing affordable.

Apartment rental rates have been moving up, making home buying financially attractive. Additionally, as the millennial generation leaves the nest, a sharp spike in household formation is translating into higher demand for new homes.

Further, there is a production deficit of both rental and new homes compared with housing demand resulting in pent-up demand against limited supply. Land and labor shortage is limiting the production of homes.

With oil prices still subdued and the job market looking good, the demand for new homes is on a steady rise.

How Did the Players Fare Last Quarter?

Lennar Corporation ( LEN ) and D.R. Horton, Inc. ( DHI ) beat the Zacks Consensus Estimate for both earnings and revenues in the last reported quarter. While Lennar reported fiscal third quarter results in September, D.R. Horton came out with fiscal fourth quarter results in November.

Lennar's earnings increased 23% year over year driven by solid revenues, improved SG&A leverage and a lower tax rate. Revenues rose 24% backed by a double-digit increase in home deliveries and higher ASPs. D.R. Horton's earnings surged 33.3% year over year, driven by a jump in homebuilding revenues and pre-tax profits. In fact, both homebuilders have delivered positive earnings and sales surprises in all the reported quarters of 2015. Both are confident of continued strong performance in 2016.

PulteGroup, Inc. ( PHM ) missed the Zacks Consensus Estimate for both earnings and revenues in the September quarter. Moreover, revenues declined 6% and earnings decreased 11%. Production delays mainly due to labor shortages and difficult weather conditions in some markets in the first half of the year hurt home closings in all the three quarters reported so far.

KB Home ( KBH ) reported mixed third quarter fiscal 2015 results on Sep 24, beating the Zacks Consensus Estimate for earnings while missing the same for revenues. However, this Los Angeles-based homebuilder provided an encouraging outlook for the rest of the year. It also expects strong momentum into 2016.

Toll Brothers, Inc. ( TOL ) is due to report fourth quarter and fiscal 2015 results (ending Oct 2015) on December 8.

All five of the largest homebuilders carry a favorable Zacks Rank -- #1, 2 or 3 -- which clearly highlights the favorable outlook of the investment community for the housing industry despite the near-term headwinds.

A look at the Earnings ESP in the table does shows that Toll Brothers is likely to beat expectations when it reports its quarterly result in December.

Zacks Industry Rank

Within the Zacks Industry classification, we rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank .

As a guideline, the outlook for industries in the top 1/3rd of all Industry Ranks or a Zacks Industry Rank of #88 and lower is 'Positive,' the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is 'Neutral' and the bottom 1/3rd or Zacks Industry Rank of #177 and higher is 'Negative.'

The Zacks Industry Rank for the construction industry is currently at #227. This is in the lower 1/3rd of all industries ranked, highlighting the group's negative outlook due to recent soft housing data and labor shortage issues.

Earnings Trends

If we look at the overall results of the Construction sector, earnings increased 12% in the September quarter. Total revenues declined 1.6% in the quarter. The sector racked up an earnings beat ratio (the percentage of companies coming out with positive surprises) of 75% and a revenue beat ratio of 41.7% in the September quarter.

Earnings and revenues for the December quarter are expected to decline 6.2% and 2.9%, respectively.

For more details about earnings for this sector and others, please read our ' Earnings Trends .'

Bottom Line

With the housing market recovering strongly in 2015, homebuilders are increasingly optimistic of a continued momentum into 2016. However, labor shortages, a slight slowdown in sales in Texas/Houston, increasing competitive pressure and rising land and construction cost amid moderating home price increases will be the headwinds to contend with.

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LENNAR CORP -A (LEN): Free Stock Analysis Report

D R HORTON INC (DHI): Free Stock Analysis Report

PULTE GROUP ONC (PHM): Free Stock Analysis Report

KB HOME (KBH): Free Stock Analysis Report

TOLL BROTHERS (TOL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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