The Housing Recovery Continues

Following the spectacular growth recorded by homebuilders during the heights of the housing recovery, figures indicating  slowdown may lead one to think that the recovery is over. Indeed, some commentators have claimed that this is the case. However, what we're seeing now seems more like a process of normalization as the market returns to a more sustainable rate of growth. D.R. Horton (NYSE: DHI  ) , for example, just posted an excellent quarterly report, as did builders M/I Homes (NYSE: MHO  ) and NVR (NYSE: NVR  ) .

Demand remains solid
If D.R. Horton's first-quarter report is anything to go by, it would seem as if the end of housing recovery in America is still a ways off. Quarterly EPS of $0.36 easily beat the $0.29 consensus estimate, with net income up a whopping 86% to $123.3 million. The company's other key metrics were also impressive. The value of net sales orders increased by 14% to $1.5 billion, and the number of homes closed was up by 33% in value.

Clearly, management was pleased with the company's performance to kick off fiscal 2014. They stated that housing market conditions are seeing continued improvement across most of the company's operating areas. Additionally, management saw the weekly sales pace increase in January, commenting that the company is well positioned to take advantage of the spring selling rush.

In general, the housing market seems to be holding up well. Buyers are adjusting to the higher rates that had housing analysts worried not too long ago. As a result, D.R. Horton has been able to increase its pricing power as demand remains strong and supply is shrinking. However, some believe that the company's results are not indicative of the broader market; a slower pace of growth may be expected in the coming months.

Industry strength
Some other companies in the industry also reported earnings recently, and they look encouraging. M/I Homes, despite missing estimates by a wide margin, posted some very impressive earnings growth with fourth-quarter EPS more than doubling to $0.48. Revenue easily beat expectations, up 34% to $336.3 million, and homes delivered rose by 26%. These strong figures were according to management not only due to improving conditions on the housing market, but also due to successful execution.

Elsewhere in the industry, NVR reported a blowout fourth quarter with net income up 61%. EPS of $21.15 smashed the $16.26 consensus estimate and rose 77% year over year. This increase was driven largely by a 10% increase in average new order price, as orders were mostly unchanged. Looking at these industry results, it would be hard indeed to announce the end of the housing recovery.

Fundamentals and metrics
Valuations seem to be a bit tricky with homebuilders at the moment as earnings have been all over the place and forward earnings should be taken with a grain of salt. In any case, looking at forward P/E, M/I Homes is the cheapest, trading at 9.9 times forward earnings. D.R. Horton is a bit more expensive at 11.6 times forward earnings, as is NVR at 12.4. M/I Homes' trailing P/E is also very low, although 4.8 times trailing earnings looks a bit suspicious. This company's return on equity is excellent at around 35%, although its total debt-to-equity ratio of around 90 is a bit high compared to the other companies mentioned here. Looking at metrics, it might be the best bet of the three.

The bottom line
The housing recovery in the U.S. looks like it has legs, with prices stabilizing and growth slowing to a more sustainable pace. Buyers seem to have adjusted to the higher rates, while demand is strong and inventory is shrinking. As such, homebuilders might have a very good run in the coming year, having been beaten down through much of 2013..


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