This earnings season has been a bit of a mixed bag for home builders, with some companies reporting stronger than expected results and others missing the mark. After a period of explosive growth, the housing market seems to be slowing down again, which is bad news for home builders. Let's take a look at the results of two of the main home builders, D.R. Horton (NYSE:DHI) and PulteGroup (NYSE:PHM), as well as the broader housing market.
Housing cooling off?
Some worrying numbers have emerged on the state of the U.S. housing market recently. New home sales tanked 13.3% year over year in March for the worst monthly performance since April 2011, which may indicate that the period of solid recovery is coming to an end. Strangely enough, prices shot up at the same time with an 11.2% sequential rise.
Analysts point to ballooning borrowing costs and lack of inventory as the prime culprits behind these poor sales figures. Credit is tight at the moment, with the average 30-year fixed mortgage up to 4.27% from 3.41% a year ago. However, something else has also been going on: More expensive homes are generally still in strong demand, with most of the declining sales concentrated in the range of houses priced below $300,000. With prices and borrowing costs rising, lower-income households are feeling the pinch.
Home builders' results
Contradicting these gloomy figures for the overall housing market, D.R. Horton delivered strong results in its most recent quarterly report. Benefiting from rising prices, America's largest builder posted an 18% rise in profit for its second quarter. Its earnings per share of $0.38 beat the $0.34 consensus estimate, as did its revenue of $1.7 billion. Completed home sales were up by 10%, as was the average sales price of homes, which reached $278,900.
However, the company has also recognized the need for lower-priced homes. It recently launched a new brand, Express Homes, which offers houses for between $120,000 and $150,000. Management believes that there is a great deal of demand in this price category, while inventory is limited due to investors snapping up cheap properties after the housing bust.
D.R. Horton doesn't seem to be suffering from the housing slowdown as much as rival PulteGroup, which posted almost the exact opposite result in terms of homes closed. This is strange, as PulteGroup generally sells more expensive homes, which seem to be in higher demand at the moment.
PulteGroup missed on earnings as well as revenue. Its EPS of $0.19 was down from $0.21 a year ago to miss the consensus by $0.01. Home closings were down 10%, while at the same time, the average price of homes closed rose 10% to $317,000. New net orders were down 6%, while the value of these orders increased by 2%. Still, management is confident that the results will pick up later this year, arguing that the housing market is still in the early stages of a long-term recovery. In any case, these numbers are confusing, as the March report would suggest that PulteGroup would have performed better than D.R. Horton.
The bottom line
Recent figures on the U.S. housing market have been somewhat confusing. In March, sales suffered their worst monthly drop in years, while prices continued to rise and credit stayed tight. This is partly a story of inequality, as the premium home segment is still doing well, but affordable home sales are down. Strangely enough, this did not reflect in home builders' earnings, as D.R. Horton, which generally offers lower-priced homes, outperformed PulteGroup by a wide margin. As such, investors should approach the industry with caution until the market stabilizes again.
Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.
Daniel James has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.