Since the turn of the year, the housing market has been on the mend (click here for when we spotted the recovery), and homebuilders have been posting excellent results as of late. At the end of July, we more definitively announced that we thought the US housing market was back, and subsequent results and commentary have strengthened our thesis. We plan to take a close look at our valuation models of a number of homebuilders today, but we don’t expect any companies’ share prices to fall outside of their updated fair value ranges, which we plan to release this afternoon.
During the past several months, many US major banking institutions and mortgage originators have been posting fantastic results. Both JP Morgan Chase (click ticker for report: ) and Wells Fargo (click ticker for report: ) announced increased mortgage originations and improved refinancing activity. JP Morgan CEO Jamie Dimon reiterated during an interview Friday afternoon that all of the key indicators within the housing market are positive.
Just this morning, two homebuilders, DR Horton (click ticker for report: ) and Beazer Homes (BZH) reported relatively strong fourth quarter results. DR Horton’s revenue surged 21% year-over-year to $1.3 billion, while earnings exceeded consensus estimates, nearly tripling on a year-over-year basis to $0.30 per share. The company’s unit backlog soared an impressive 49% year-over-year to 7,240 homes, while the backlog value jumped significantly as well, expanding 61% year-over-year to $1.7 billion. We like the company’s current backlog distribution, which is heavily tied to the southeast, south central regions, and west coast regions of the US; all of which are benefitting incredibly from the housing recovery and favorable demographic trends.
Beazer’s results weren’t nearly as strong, as the company struggles with a less favorable cost structure. Revenue grew 11% year-over-year to $370 million, slightly stronger than expected, while earnings continued to flounder, with the company losing $2.57 per share—though that figure was greatly influenced by a loss on extinguishment of debt. However, its cancellation rates continued to decline (down 310 basis points on a year-over-year basis) while its gross margins improve (up 190 basis points on a year-over-year basis). Beazer remains well capitalized for the time being, and similar to DR Horton, much of its backlog is in favorable regions.
Although we expect improving industry conditions to prevail, the homebuilders are fairly valued at current levels. Monetary policy will remain highly accommodative, in our view, but downside is possible if fiscal policy cuts off any benefits. Our favorite playing on housing at the moment remains the Financial Select Sector SPDR ETF (XLF), which we hold in the portfolio of our Best Ideas Newsletter. We think continued strength from the housing market will boost the value proposition for banks, despite the potential for lower net interest margins and higher capital reserve provisions.