Zacks Industry Outlook Highlights: PulteGroup, D.R. Horton, Lennar and KB Home
CHICAGO, Dec. 16, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Homebuilding, part 1, including PulteGroup, Inc. (NYSE:PHM-Free Report), D.R. Horton, Inc. (NYSE:DHI-Free Report), Lennar Corporation (NYSE:LEN-Free Report) and KB Home (NYSE:KBH-Free Report).
Industry: Homebuilding, part 1
Link: http://www.zacks.com/commentary/36091/will-housing-stabilize-in-the-new-year
A string of housing data released last month portrays a mixed to slightly positive picture of the housing market.
Sale of existing homes rose 1.5% in October for the second month in a row. Interestingly, sale of existing homes rose 2.5% from the same month last year — the first year-over-year increase since Oct 2013.
Building permits — a gauge of future constructions — improved for the second consecutive month in October. After improving 1.5% in September, building permits grew 4.8% in October.
Though housing starts declined 2.8% sequentially in October, it improved 7.8% year over year suggesting that the broader housing trends are very much in place. Moreover, single-family housing starts rose 4.2% in October, clearly indicating that the drop in housing starts in the month was driven by a slide in multi-family construction — a rather volatile sector.
Home builders are also turning more optimistic as demand for new homes rises with an improving job market and growing consumer confidence. Homebuilders' confidence, as indicated by the National Association of Home Builders (NAHB)/Wells Fargo housing market index, rose 4 points to 58 in November — a relief after a drop by the same magnitude last month.
Having said that, new home sales in October fell short of analyst expectations. It grew a meager 0.7% in October from a revised-down September number.
And yet, the above mentioned data clearly indicates that the housing market is recovering at a steady and gradual pace after a slump at the beginning of the year. Thanks largely goes to stabilizing mortgage rates, overall economic growth, improving job numbers, moderating home prices and a low level of housing inventory.
With the economy looking better in 2014 than last year, the housing outlook for 2015 is stable to slightly better.
However, what keep us concerned are the chances of a rise in short-term interest rates in 2015 as the Fed has already ended its six-year long quantitative easing program in October.
Though the Fed had earlier promised to keep the key interest rate at record low for a 'considerable time,' investors have started speculating about the timing of the planned rate hike. The robust job numbers might draw the Federal Reserve closer to raising interest rates. Higher interest/mortgage interest rates may have a moderating effect on demand and pricing.
How Did the Major Players Fare Last Earnings Season?
The September quarter was rather mixed for the homebuilders due to softer housing demand and an overall weak operating environment.
PulteGroup, Inc.'s (NYSE:PHM-Free Report) third quarter results were mixed, though it improved upon its second quarter performance. The Atlanta-based homebuilder beat the Zacks Consensus Estimate for earnings while delivering in line revenues. Earnings declined year over year due to softer orders and gross margins while homebuilding revenues rose as home price increases made up for the order shortfall and a lower number of homes delivered.
Higher closings and pricing gains helped D.R. Horton, Inc. (NYSE:DHI-Free Report) beat the Zacks Consensus Estimate for revenues. However, earnings missed the consensus. Management has increased incentives in 2014 to quicken the sales pace. Though the strategy worked well for order trends, it took a toll on gross margins.
Lennar Corporation (NYSE:LEN-Free Report) beat the Zacks Consensus Estimate for both earnings and revenues in the third quarter, helped mainly by strong pricing and solid margins. KB Home (NYSE:KBH-Free Report) reported disappointing third quarter 2014 results as the company missed the Zacks Consensus Estimate for both revenues and earnings. Soft orders and a lower number of homes delivered hurt sales and profits.
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