Homebuilding stocks have gotten hammered this year. The SPDR S&P Homebuilders ETF is currently down more than 25% from its high at the start of the year. Many issues have weighed on the homebuilder sector, including supply chain disruptions, rising costs, and higher mortgage rates.
However, while the industry faces some near-term headwinds, America has a severe housing shortage, estimated at more than 5 million homes. So homebuilders believe their stocks are cheap, given the opportunity ahead. That's leading a growing number of homebuilders to launch meaningful share repurchase programs.
Image source: Getty Images.
Doubling down
Lennar (LEN 0.30%)(LEN.B 0.62%) has ramped up its share repurchase program in recent months. The leading homebuilder replenished its share repurchase authorization last October. At the time, its board granted the company permission to repurchase up to the lesser of $1 billion in stock or 25 million shares. The company has made quick use of that program. It repurchased 5.3 million shares for $526.3 million in the first quarter.
However, with its share price still under pressure, the board approved a new $2 billion share repurchase program. That's a sizable authorization considering that Lennar's current market cap is around $23.5 billion.
Lennar's bullish outlook on the housing market is a big driver of the decision to boost its repurchase program. Executive Chairman Stuart Miller commented on what the company sees ahead in the first-quarter report:
The housing industry continues to exhibit strong demand, outweighing supply, and we are confident that we will continue to generate solid growth and enhance our current market position...For the full year, we are increasing our guidance on both deliveries and gross margin...Overall, we are operating from a position of strength with an excellent balance sheet enabling us to continue to execute on our core strategies.
With market conditions still strong in the face of growing headwinds, Lennar sees value in its stock, leading it to boost its buyback.
NYSE: LEN.B
Key Data Points
A big-time buyback
KB Home (KBH 0.69%) is also taking advantage of the disconnect between market conditions and its stock price. The homebuilder recently reported strong first-quarter results while providing an optimistic outlook for what's ahead. CEO Jeffrey Mezger stated in the earnings report: "We believe we will generate meaningful returns-focused growth in 2022, and we are reaffirming our revenue guidance for the year, with 30% growth to $7.4 billion, and modestly increasing both our operating margin and return on equity expectations to over 16% and 27%, respectively."
With its share price sinking despite that bullish view, KB Home launched a meaningful share repurchase program of up to $300 million. At its current market cap, that's enough to retire nearly 10% of its outstanding shares.
NYSE: KBH
Key Data Points
Taking advantage of the disconnect
Green Brick Partners (GRBK 3.00%) is benefiting from strong demand across the Sun Belt region. That's enabling the homebuilder to achieve pricing power and boost its sales prices above rising costs. The company doesn't see those strong conditions fading even with rising mortgage rates.
Despite all that, its stock price has been under pressure this year. That provides the company with an opportunity to buy back its shares at an attractive price. CEO and co-founder Jim Brickman stated in the first-quarter earnings release:
Seeing a disconnect between management's positive view of the business and our strong operating results versus the contrasting sentiment of some investors and analysts, the company purchased 1.2 million of its shares during the quarter at an average price of $21.63 for a total investment of $25.8 million. In April 2022, the company purchased an additional 1.2 million shares at an average price of $19.72, bringing total shares repurchased to a total of 2.4 million shares which is 4.8% of shares outstanding as of the beginning of the year. These purchases have combined to fully utilize the $50 million amount previously authorized.
With the disconnect remaining and its prior authorization drained, the company launched another repurchase program for up to $100 million of additional shares. That's a sizable amount for a company with a current market cap of around $1.2 billion.
Homebuilders think their stocks are a bargain
While there's a lot of near-term uncertainty in the housing market because of rising interest rates, there's still a significant amount of demand. Homebuilders therefore believe the stock market has undervalued their earnings capability. That's leading a growing number of homebuilders to launch large-scale buybacks to take advantage of this disconnect. Those buybacks are a potential catalyst that value-conscious investors won't want to miss.
