NEW YORK (TheStreet) -- Homebuilders are getting much more confident about the economy as the summer wears on -- and their stocks should reap the benefits soon.
Homebuilder confidence pierced a pivotal level in July's survey by the Wells Fargo and the National Association of Home Builders, reaching 51 on a 100-point scale for the first time since January, when the polar vortex began cutting into sales. The index measuring today's sales conditions increased four points to 57, while the index measuring expectations for future sales rose six points to 64, the survey said. Traffic of prospective buyers increased three points to 39 on the survey's scale.
Investors should be moving now to consider whether this means building stocks can finally shake off their recent torpor -- most builders have trailed the broader market this year. Earnings reports begin next week, with NVR (NVR - Get Report) reporting Monday, followed by Pulte Home (PHM - Get Report), D.R. Horton (DRI) and Meritage Homes (MTH). Ryland Homes (RYL) delivers numbers on July 31.
"We rate NVR INC (NVR) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- NVR's revenue growth trails the industry average of 17.7%. Since the same quarter one year prior, revenues slightly increased by 5.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- The current debt-to-equity ratio, 0.45, is low and is below the industry average, implying that there has been successful management of debt levels.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Household Durables industry and the overall market, NVR INC's return on equity exceeds that of both the industry average and the S&P 500.
- Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
- NVR INC's earnings per share declined by 24.6% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, NVR INC increased its bottom line by earning $55.77 versus $35.18 in the prior year. This year, the market expects an improvement in earnings ($63.22 versus $55.77).
- You can view the full analysis from the report here: NVR Ratings Report