It's almost passe, isn't it? A homebuilder posts great growth, beats the estimates, and trades at an apparently low price-to-earnings ratio (P/E), yet management doesn't think there's a housing bubble. Add Lennar
Results in the second quarter were as strong as a well-built house. Revenue climbed 25%, operating earnings climbed 16%, and earnings per share (EPS) climbed 27%. New-home deliveries climbed 15%, and average selling prices rose by 10%.
Lennar management stated what has become the standard party line from homebuilders -- the business has "excellent long-term prospects" because of good employment and wage trends, limited land, and the aging of the existing home base around the country. Backing this up, backlog rose 25% to $7.3 billion -- a figure that covers nearly three-quarters' worth of revenue.
I'd like to talk about the balance sheet, but I can't. For whatever reason, Lennar management doesn't see fit to include a balance sheet in its earnings release. Nevertheless, management boasted more than once about the strength and quality of that balance sheet. As loyal readers of The Motley Fool know, this sort of thing irks us. Shareholders are the owners of this company, and we believe that owners are entitled to see an income statement, balance sheet, and cash flow statement with an earnings release.
So, what to make of the housing market? Obviously, business is still strong, as prior earnings reports from the likes of Hovnanian
Whether it's a bubble or not is for others to debate. I'd simply point out that we've seen regional real estate bubbles in this country before, and Japan saw a more-or-less national bubble (at least in urban areas) fewer than two decades ago. So it can happen.
What's more, lending terms in this country are getting looser and looser (look at the blooming of no-money-down and/or interest-only mortgages), and banks are so eager to compete for mortgages that they've kept mortgage rates extremely low for quite some time.
Perhaps the real estate agents and homebuilders are right, and we will somehow see a multi-year boom in residential real estate fueled by good jobs and limited land. But how many industries do you know of that have been able to grow at such high rates for long periods of time? History doesn't turn up too many examples, and those that you find are usually fueled by a major shift in technology or consumer tastes (like plastics, computers, and the like).
Given the generally low P/Es across the homebuilding sector, it seems that the market doesn't expect never-ending growth, either. While strong current results and backlogs would suggest that imminent collapse is unlikely, markets can turn more quickly than investors often believe. As such, I'm more inclined to stay away from the residential construction market and look instead toward more commercial and infrastructure construction-oriented themes.
Build some knowledge about the homebuilders:
- KB Home's California Dreaming
- Home Sweet Homebuilder
- Never Mind the Bubble
- Home Stocks, Sweet Home Stocks
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).