D.R. Horton to Outpace Homebuilder Peers

Homebuilder stocks are in positive territory despite disappointing home construction data. D.R. Horton is poised to outpace its peers, according to one analyst.
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NEW YORK (

TheStreet

) -- Stocks in the homebuilding sector, including

D.R. Horton

(DHI) - Get Report

,

Lennar

(LEN) - Get Report

and

KB Home

(KBH) - Get Report

, traded comfortably in positive territory Tuesday despite the release of weaker-than-expected data on new home construction activity.

The

construction of new homes rose 1.7% last month

, to a seasonally adjusted annual rate of 546,000 units. But the figure was expected to rise to 560,000 units, from a downwardly revised rate of 537,000 in June. The implication is that the housing market continues to flounder as it works to regain its footing after federal tax credits for homebuyers expired April 30.

"None of this is good news for homebuilders, which are not profitable despite a year of expensive federal stimulus programs with revenue still at the lowest level in a decade," noted Vicki Bryan, senior high yield analyst at Gimme Credit.

VOTE: Do We Need Another Homebuyer Tax Credit?

Would a new round of credits help or hurt the housing market?

Bryan does not support the idea of another tax credit; to the contrary, she was opposed to homebuyer tax credits in the first place. Still she expects it will take years for demand in the housing market to rebound "to the hyper inflated levels reached at the peak of the boom, levels now shown to have been inflated by 'creative' strategies that put too many people into too many homes they can't afford to keep."

High rates of foreclosures and joblessness combined with a frustratingly tepid economic recovery "could keep the lid on housing demand for years, which in turn could keep home inventory levels elevated," Bryan added. "That signals a protracted period of weak home prices, weak revenue and weak profitability for homebuilders."

Still, sector watchers seemed to shrug off the morning's weaker-than-expected home data, focusing instead on the small rise in construction, with builders willing to take what they can get as the group stumbles along toward some hope of reprieve. The homebuilder sector was clearly buoyed by

an overall market rally

on the latest M&A news, better-than-expected industrial production growth and promising retail earnings reports.

All the major sector players traded up Tuesday, though naturally some fared better than others, and with good reason.

D.R. Horton shares gained 2.9% to close at $10.47 Tuesday on lighter-than-normal trading volume. Bryan noted Horton's revenue "fell faster than the group average through most of the housing recession, and it lost its advantage as a cost leader," though it benefited from a short-lived rebound amid artificially inflated demand generated by the homebuyer stimulus programs.

VOTE: Do We Need Another Homebuyer Tax Credit?

Would a new round of credits help or hurt the housing market?

The Forth Worth, Texas-based builder returned to year-over-year profitability when it reported its fiscal third-quarter results earlier this month, booking earnings of $50.5 million, or 16 cents per share, from a loss of $143.8 million, or 45 cents per share, in the year-earlier period. Closings surged 60% to 6,805 homes in the period, but the jump largely reflected the pull-forward effect of buyers rushing to close on their purchases in time to take advantage of the tax credits.

>>4 Top Homebuilder Stocks: Life After the Tax Credit

Horton reduced its debt, and therefore its leverage, "to less egregious levels and cash on hand is nearly 40% of revenue," Bryan added. "This leaves

Horton better equipped than many of its peers to manage a protracted period of weakness in the new home market." Although the worse may be over, many sector watchers anticipate that the housing market could remain at profoundly unprofitable levels for at least another year.

Lennar, meanwhile, gained 1.1% Tuesday. Bryan noted that Lennar "has some of the strongest credit metrics" among homebuilders. Even so, the analyst remained concerned that Lennar began to ramp up its spending on land and joint venture projects before restoring its cash flow from operations to a level of sustainability, and it has not reduced its leverage from historically inflated levels.

Bryan expects the housing market will remain seriously pressured for another year or two, putting Lennar in a vulnerable spot with the absence of tax refunds to replenish its cash.

KB Home shares closed Tuesday's session higher by 2.2%, to $10.52. Bryan said the Los Angeles firm could face an even rougher road ahead than many of its peers because it caters to entry-level homebuyers. She added that "KB's bonds trade at levels that do not appear to capture the appropriate risk apparent in its credit profile."

The homebuilder group tends to move together in a tight band when it comes to stock price, with few outliers. That was certainly the case Tuesday with most sector players trading up several percentage points.

PulteGroup

(PHM) - Get Report

traded at the highest volume, with nearly 6 million shares in play, though the figure was below the stock's 30-day trailing average volume of 8 million shares.

The

SPDR S&P Homebuilders

(XHB) - Get Report

, an exchange-traded fund that tracks the homebuilder sector and counts Lennar among its top holdings, closed the day up 2.7%. The

iShares Dow Jones US Home Construction

(ITB) - Get Report

ETF, which counts D.R. Horton, Lennar, KB Home and PulteGroup among its top holdings, finished up 2.9%.

VOTE: Do We Need Another Homebuyer Tax Credit?

Would a new round of credits help or hurt the housing market?

-- Reported by Miriam Marcus Reimer from New York.

RELATED STORIES:

>>Homebuilder Stocks: Volume Leaders

>>New Home Construction Rises in July

>>Homebuilder Sentiment Edges Lower

>>4 Top Homebuilder Stocks: Life After the Tax Credit

>>POLL: Do We Need Another Homebuyer Tax Credit?

>>Mortgage Applications Tepid Despite Rates

>>Beazer Homes: Hard Times Ahead

>>Horton, Ryland Upgrades Lift Homebuilders

>>PulteGroup Returns To Profitability

>>Homebuilders Stock Winners and Losers

>>Home Prices Weaken, Sales Rise

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