As the U.S. emerged from the rubble of the housing collapse, low interest rates and a growing population helped push homebuilders to stunning gains. But the fear of increasing interest rates derailed the sector this past May, causing some blue-chip builders' shares to fall as much as 15% to 30%. Now, with the threat of higher interest rates defanged following the recent government shutdown, I believe it may be time for long-term investors to venture into the sector. Here are five intriguing homebuilder stocks that could now be trading at bargain prices.
The nation's largest homebuilder
D.R. Horton (DHI -3.70%) (DHI -3.70%) builds and sells single-family homes. Last year, the company sold 18,890 homes at an average price of $223,300. This is the 11th straight year that D.R. Horton has sold more homes than any other homebuilder. The company operates in 26 states, covering most regions of the U.S.
Over the past year, D.R. Horton has used its size advantage to reduce costs and increase market share. This has resulted in impressive performance, increasing both the number of homes sold as well as the average price. It has a backlog of $1.7 billion in sales, up 61% from a year ago. D.R. Horton has dropped almost 30% from its May high, creating an excellent opportunity to acquire a solid company at a bargain price.
Building homes for more than 50 years
KB Home (KBH -3.35%) is one of the largest homebuilders in the U.S. and has been building homes for more than 50 years. The company builds single family homes, condominiums, and town houses in 10 states.
The company has recently shifted strategy toward building higher priced homes. This strategy has been paying off with an expected revenue growth of 40% year-over-year. The company is currently selling more homes at higher prices and is expected to continue to grow earnings over the next 3 to 5 years. The stock price of KB Home has dropped 28% since May and at this price represents a good value play.
Focus on upscale housing
M.D.C. Holdings (MDC) is focused on the upscale housing market, where the average price is about $308,000. This figure is up 14% from a year ago, which should substantially boost M.D.C.'s bottom line. The company sells single-family homes under the name "Richmond American Homes" and operates in 10 states, primarily in the Western, Mountain, and Southern regions of the United States.
In 2012, M.D.C. Holdings returned to profitability, reporting its first annual profit since 2006. This was achieved by a combination of superb management (reducing administrative costs) plus aggressive marketing (selling 37% more homes than it did in 2011).
During the fourth quarter of 2012, the company acquired over 2,300 lots at a cost of more than $150 million. This represents more lots than were acquired during the previous four quarters combined, demonstrating that M.D.C. Holdings is confident about the future. Despite a solid performance in 2012, the stock price of M.D.C. Holdings is off 24% since May of this year, providing a good entry point for the patient investor.
Sitting on a large cash position
PulteGroup (PHM -4.26%) is the second largest homebuilder in the United States, building both single family residences and subdivisions. In 2012, it sold 16,505 units in 28 states. Last year the company returned to profitability for the first time since 2006. This was achieved by focusing on profits rather than using discounts to increase sale volume.
Through the first nine months of this year, the company's performance has been amazing; investing $918 million in land and development, paying down $461 million in debt, and repurchasing $83 million in stock. The company also reinstated a quarterly dividend of $0.05 a share and is sitting on $1.4 billion in cash. Even with these enviable performance statistics, the price of PulteGroup is off 25% from the May high, which has moved this stock into the bargain basement.
Luxury home builder
Toll Brothers (TOL -3.36%) builds upscale homes, condominiums, and townhouses in 19 states, with an average home price of $573,000 in 2012. The company expects to build between 3,400 and 4,400 homes in 2013 in 50 of the most affluent markets within the U.S. The luxury home market was not strong in 2012, but it's improving now, which should lead to even better performance by the company in 2014.
Toll Brothers has an excellent balance sheet, with more $1.2 billion dollars in cash at the end of July 2012 and a debt-to-total-capital ratio of only 43%. The price of Toll Brothers has dropped about 15% since May, making this an attractive time to buy for value investors.
Still plenty of room to grow
Happily, the housing market still has plenty of room for further expansion. For example, the number of new home sales in 2012 increased 20% over 2011, to an annual pace of 367,000 new homes. However, this is still well below the 20-year average pace of 760,000 new homes per year. Also, the prices of new homes are on the rise, but they remain below the 2007 peak as measured by the S&P/Case-Shiller 20-city index.
Foolish bottom line
The Fed's decision to continue asset purchases should keep interest rates low, which is a large plus for homebuilders. The entire sector will also benefit from a robust economy but the sale of upscale housing will likely profit the most. Thus, my favorite home builder is Toll Brothers, because of its unique position in the luxury home market coupled with its rock-solid balance sheet.
