Housing Sales Surge Could Push Homebuilders Higher -- if It Lasts

NEW YORK (TheStreet) -- The last two days of housing stats are looking very nice indeed -- especially today's.

For this past month, anyway, these numbers are eroding -- though not wiping away -- the concerns that have been cropping up about home sales. Housing seemed to be the one part of the economy not recovering smartly from this winter's weather-induced growth stallout.

Today the Census Bureau reported that new single-family home sales rose 19% in May to an annual rate of 504,000 -- the best since 2008. That followed a report Monday that existing-home sales rose 5% in May from April, though they remain almost 5% below May 2013 levels.

The news is heartening on three levels.

The first is the most obvious. People are beginning to buy houses, apparently. And the gain in inventories of existing homes for sale last month may quell fears that people with mortgages bigger than their homes' value will stay put in large-enough numbers to stall the recovery.  

Importantly, this points to more gains this summer, since a shortage of homes for sale has been limiting the market's recovery for a year or more.

Secondly, the gain in new home construction is great for jobs. Every new single-family home built is worth three to four new jobs, depending on whether you include likely hiring at home-improvement centers like Home Depot (HD) or Lowe's (LOW), furniture stores and the like.

If May's gains are sustained, that's would be an important factor in pushing the 6.3% unemployment rate below 6% by fall. The jump reported today works out to 300,000 to 400,000 jobs if sustained -- by itself, enough to shave 0.2% off unemployment.

Thirdly, at least some home builders are running lean enough that a pop in sales will fall quickly to the bottom line.


WATCH: More market update videos on TheStreet TV | More videos from Joe Deaux

Case in point: Pulte (PHM) said in April that it had expanded its gross margins for nine straight quarters, climbing by 5.8 percentage points to 23.8% of revenue.

"Last time our margins were at this level was back in 2005, a time when industry volumes and related demand were obviously much higher than what we [are] experiencing currently," Pulte CEO Richard Dugas said. "Stated plainly, we are running a much more efficient business today, as we're able to generate much higher earnings at current production levels."

Likewise, rival Ryland (RYL) said its home building gross margins rose 1.7 percentage points to 21.1%.

"We anticipate that gross margin will gradually claim as the year progresses," CEO Larry Nicholson said.

It's management 101 that margins respond quickly to a pop in demand when a business is running lean. If May is really the beginning of a strong summer, with new-home sales gains in the same mid-teens range as in 2012 and 2013, that could lead to a nice run for builders.

Now let's check in with TheStreet Ratings for their take on Pulte and Ryland.


TheStreet Ratings team rates PULTEGROUP INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate PULTEGROUP INC (PHM) a BUY. This is driven by some important positives, 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 largely solid financial position with reasonable debt levels by most measures and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The current debt-to-equity ratio, 0.40, is low and is below the industry average, implying that there has been successful management of debt levels.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Household Durables industry and the overall market, PULTEGROUP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • PHM, with its decline in revenue, underperformed when compared the industry average of 17.5%. Since the same quarter one year prior, revenues slightly dropped by 3.8%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • The change in net income from the same quarter one year ago has significantly exceeded that of the Household Durables industry average, but is less than that of the S&P 500. The net income has decreased by 8.5% when compared to the same quarter one year ago, dropping from $81.76 million to $74.82 million.
  • PULTEGROUP INC's earnings per share declined by 9.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, PULTEGROUP INC increased its bottom line by earning $6.74 versus $0.53 in the prior year. For the next year, the market is expecting a contraction of 82.8% in earnings ($1.16 versus $6.74).

TheStreet Ratings team rates RYLAND GROUP INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate RYLAND GROUP INC (RYL) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, notable return on equity and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including generally higher debt management risk, weak operating cash flow and a generally disappointing performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 17.5%. Since the same quarter one year prior, revenues rose by 30.7%. 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 company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Household Durables industry and the overall market, RYLAND GROUP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • RYLAND GROUP INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, RYLAND GROUP INC increased its bottom line by earning $6.81 versus $0.84 in the prior year. For the next year, the market is expecting a contraction of 56.3% in earnings ($2.98 versus $6.81).
  • Currently the debt-to-equity ratio of 1.53 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated.
  • Net operating cash flow has significantly decreased to -$25.06 million or 204.17% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

More from Opinion

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy

Throwback Thursday: Tesla, Chip Stocks, TheStreet's Picks

Throwback Thursday: Tesla, Chip Stocks, TheStreet's Picks

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

Musk Goes on Unoriginal Media Tirade

Musk Goes on Unoriginal Media Tirade

What's Happening in Video Games This Week: On the Road to E3

What's Happening in Video Games This Week: On the Road to E3