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By
Brian Noer
January, 2005
Homebuilder
Stocks Finish Up A Record Breaking Year With Strong Projections For 2005.
A new report by Banc of America Securities (Homebuilding Update Raising Estimates
and Target Prices on Further Margin Expansion) has projected 16% growth for
the homebuilder sector in 2005, despite previous industry anticipations of a
market slowdown. Earlier in December most major homebuilding companies
reported banner year end reports, with share prices jumping to record
amounts (with a few dips and gains thrown in, a result of reports and data
released at year end by different homebuilder sector agencies).
While the Banc of America report (By
Daniel Oppenheim) expects to see 2005 new home sales dropping by 8%
nationally due to rising interest rates, the major companies should continue
to capture market share from smaller, private homebuilders. This is
particularly good news for manufacturers of building materials, like
International Barrier (OTCBB: IBTGF)
whose Blazeguard® fire resistant paneling is currently being used by four of
the nation’s major homebuilders.
Towards the end of December share
prices of the major homebuilding companies gained, dipped, and then climbed
back up. The initial slide in trading was the result of an economic data
report from the Commerce Department stating that November sales of new
single family homes had experienced its steepest decline since 1994.
Investor concerns arising as a result of this report brought homebuilder
shares down for about a week, but then data released by the National
Association of Realtors, stating that US sales of existing homes rose 2.7
percent in November to a record seasonally adjusted annual rate of 6.94
million, saw shares gaining ground again.
While rates on 30-year and 15-year
mortgages dipped toward the end of December, Federal Reserve policy-makers
will probably keep interest rates moving upward in 2005, in order to guard
against inflation while keeping the economy expanding. Rising interest rates
normally signal a slowdown in housing starts; however the market projections
for 2005 remain very strong; for the major contenders at least.
Despite these natural market ups and
downs, and hot on the heels of record breaking returns for 2004, the major
homebuilders remain bullish for the upcoming year.
In Banc of America’s report Mr.
Oppenheim (CFA) reflects this consensus by saying that he has, “increased
confidence in the outlook for operating margins in 2005 and, as a result, we
are raising our 2005 and 2006 estimates. On average, we increased our 2005
estimates by 7% and our 2006 estimates by 9%. Earnings growth of 25% and 14%
are likely in 2005 and 2006. Our estimates are well above consensus for both
years. We are increasing our target prices based on the higher EPS
estimates.”
To illustrate this point, most of
the major homebuilders reported record breaking fourth quarter and end of
year results, in addition to sparkling forecasts for the coming year.
Toll
Brothers
"We had a tremendous year in
Fiscal 2004, which ended October 31st," said Fred Cooper, Senior Vice
President of Finance with Toll Brothers Inc. (
TOL
: NYSE). Fiscal 2004 was the company’s 12th consecutive
year of record earnings and their 13th of record revenues. Even compared
with that excellent track record, the results for 2004 were extraordinary.
"Our net income was up 57%, and revenues were up 40%. Even more
dramatic, because they are forward looking data, our new contracts were up
62% and our backlog at year end was up 68% from one year ago."
"We focus on the luxury
market," Mr. Cooper continued, "We believe that fundamentally, in
the homebuilding industry, there is not enough supply to meet demand. Supply
is being constrained by very difficult land approval processes and no-growth
politics, while demand is being fuelled by an increasing population and,
particularly in the affluent sector that we focus on, growth in households
with $100,000 + incomes, which have been expanding at six times the rate of
U.S. households in general, in the past twenty years. The large, publicly
traded home builders are the firms best able to gain land approvals because
they have the capital and expertise needed to persevere through these land
approval processes which can take many years. We, at Toll Brothers,
currently control about 60,000 home sites, which is a 5 to 6 year supply
based on our current pace of growth. If George Bush's goal is to promote
what he refers to as an ‘ownership society’, then home ownership clearly
should be a strong fundamental pillar of that philosophy."
Mr. Cooper expects that net income
for Toll Brothers will increase by at least 40% in fiscal 2005 and then by
another 20% in fiscal 2006. "We base the 2005 projection on the backlog
of homes under contract with buyers that we have in place already at year
end, which is 15% larger than our total revenues for fiscal 2004. And we are
continuing to expand the number of communities in which we are selling homes
which should drive the growth in 2006."
As regards rising interest rates and
their effect on Toll Brother's business, Mr. Cooper explained that rates
were much higher in 1995 than they are now, at over 9%, and over 8% in
1996-97 and 2000. "In those years we had record results and our
business was very strong. Comparable rates right now are about 5.75%, so
there is a lot of room for rates to move up even to the levels of the late
90s when our business was still great. And because we focus on the luxury
buyer market, they tend not to be as interest rate sensitive."
Lennar
Corp.
Lennar
Corporation (LEN) reported net earnings of US$379 million for the
fourth quarter 2004. This compared favorably to net earnings of $283.2
million in 2003. Net earnings for the year ended
November 30, 2004
were $945.6 million. Lennar’s Board of Directors
declared a quarterly cash dividend of $0.1375 per share for both Class A and
Class B common stock payable on
February 17, 2005
.
In a company press release, Stuart
Miller, President and Chief Executive Officer said that Lennar has,
"excellent visibility as we enter 2005 and we expect our company to
have another record year. In addition to our exceptional position in
land-constrained markets, our $5.1 billion backlog, our 823 active
communities at year-end and our strong balance sheet liquidity lead us to
increase our fiscal 2005 earnings per share goal to $6.90 from our previous
goal of $6.60."
Hovnanian
Enterprises
Hovnanian
Enterprises (HOV) also reported record net earnings of $348.7 million for
fiscal 2004, an increase of 35 percent over the previous year. Shares
reached a record $5.35 per share, increasing 36% from $3.93 in fiscal 2003.
Hovnanian’s management increased
their projection for fiscal 2005 earnings to exceed $6.50 per fully diluted
share, an increase of $0.20 over the previous projection of more than $6.30
per fully diluted share for the year. They also expect quarterly earnings to
be more evenly distributed in fiscal 2005.
"Fiscal 2004 marks another year
of significant revenue and earnings growth for our company," said Ara
K. Hovnanian, President and Chief Executive Officer of the Company, in a
prepared statement. "Over the past five years, we have achieved a 34%
compound annual growth rate in revenue and a 63% growth rate in net
earnings."
"Given the continuing strong
underlying demand in our markets and our healthy contract backlog as we
start the year, we are increasing our projection for fiscal 2005 to more
than $6.50 per fully diluted share," Mr. Hovnanian stated. "Our
updated earnings projection represents a more than 21% increase from 2004's
record earnings. We currently anticipate delivering over 16,000 homes in
fiscal 2005, with total revenue of over $5.0 billion, which equates to
revenue growth of more than 19%.”
KB
Home
The industry’s banner results
continued with KB Home (KBH) reporting record fourth quarter and full year
2004 results. KB’s fourth quarter earnings per share were up 34% to $4.42,
with end of year revenues of $7.05 Billion, which were up 21% on the
previous year. The company raised their 2005 earnings estimate to $14.50.
"We have strong fundamentals in
place to support our future growth goals," said a release from Bruce
Karatz, the company's chairman and chief executive officer. "As we
enter 2005, we remain committed to translating our operating success into
enhanced shareholder value. Both our recently announced 50% cash dividend
increase - which raises our yield to the highest in the industry - and our
board of directors' intention to declare a 2-for-1 common stock split in the
spring of 2005 underscore that commitment. And, with the strong momentum in
orders we experienced throughout the year and particularly the final quarter
of 2004, we feel confident in increasing our earnings estimate for 2005 to
$14.50 from $14.00 per diluted share."
Beazer
Homes
In early December, the Beazer Homes USA, Inc. (BZH) board of directors, authorized a 3-for-1 split of
common stock in the form of a stock dividend. Ian J. McCarthy, President and
Chief Executive Officer of Beazer Homes, said in a release, "The Board
of Directors' decision regarding the stock split and effective increase in
our cash dividend reflects our continued confidence in the Company's
prospects for the future to both invest in the Company's growth and to
allocate additional capital to dividends for our shareholders."
Centex
Corporation
During their annual investor
conference in October, Centex
Corporation (CTX) announced that net earnings per diluted share for the
fiscal year ending
March 31, 2006
, should be in the range of $8.75 to $9.25.
This range would represent
approximately a 20% to 25% increase over the midpoint of Centex's projected
net earnings per diluted share for the fiscal year ending
March 31, 2005
, which the company raised in their second quarter
earnings announcement.
International
Barrier
“It has been an amazing 4 to 5 years of housing,”
said Mike Huddy, President and CEO of International Barrier (IBTGF: OTCBB). “Not only are housing starts
up but there is an increase in the number of starts for multi family
housing. Clustered housing developments are a bigger part of what is going
on in the
United States
than what it used to be, for people who are entering
retirement age or for first time home buyers. Of course we plan to
capitalize on that. While our main market in housing is multifamily
residential, one of our forward looking goals is to realize applications
that will allow Blazeguard® to be used in single family residential units.
There are some scenarios where houses are built in close proximity, or for
houses located in wildfire prone areas, where Blazeguard® could be used to
help protect homes from igniting.
“We expect to continue our growth
curve not only in concert with the increasing market starts, but also due to
the fact that we expect to improve Barrier’s market share by finding more
locations across the
US
to use our paneling. As our business grows, there are
more resources being generated within the company to be used for expansion
purposes. We expect to be able to invest more in training salespeople and to
get more reps on board. We also expect that this year our ICC Evaluation
Services Report will be published which will make it easier for us to market
in the
Western US
.” (HomebuilderStocks.com published details of
Barrier’s pending ICC Evaluation Services Report in the exclusive article:
http://www.homebuilderstocks.com/Companies/HomebuilderStocks/Articles/Building_Codes.asp)
As the homebuilder market grows,
those builders that Barrier currently services will benefit financially, and
as the number of homes built increases, Dr. Huddy is certain that
Barrier’s business volume will increase directly in proportion. “In
response to the bull market and given our objectives to increase market,
share we are investing capital to improve our capacity and efficiency.”
Barrier is currently in the process of building a fifteen thousand square
foot expansion of total production capacity, at a cost of 2.7 million
dollars, to their plant. Barrier plans to achieve start-up in the third quarter of 2005. This expansion will more than double their existing
capacity, improving efficiency and increasing product uniformity and
quality.
Homebuilder
Stocks Continue to Offer Upside.
In the Banc of America report,
Daniel Oppenheim states that he continues to see an upside in homebuilding
stocks as a result of the attractive valuations (at 7.6 times estimated 2005
EPS) and continued strength in fundamentals. “We see 6% upside on average
for the homebuilding stocks based on our higher target prices. However, we
expect the stocks to digest recent gains (up 15% over the past seven trading
sessions) before another sharp move higher.”
The
Future Looks Bright
For the homebuilding sector the news
looks set to be good far beyond 2006. A report from the Brookings Institution, one of Washington's oldest and most respected
think tanks, (December 2004 - “Toward a New Metropolis: The Opportunity To
Rebuild America.” by Arthur C. Nelson) stated that residential and
commercial development in the next quarter century is set to surpass the
amazing gains that the market has experienced to date, as North America
makes plans to accommodate a rapidly growing population. By 2030 the
US
population will increase by about 33 percent, meaning
that almost 60 million housing units will need to be built. 40 million of
these homes will be new additions while the remaining 20 million will
replace destroyed or aging homes.
The report also stated that:
- In
2030, about half of the buildings in which Americans live, work, and
shop will have been built after 2000.
- Overall,
most new growth will occur in the South and the West.
- These
projections demonstrate that nearly half of what will be the built
environment in 2030 doesn't even exist yet.
Brian Noer
Brian
Noer has a degree in Business and Economics from the University
of Western, Ontario. His
career in the financial markets spans fifteen years and several continents,
including: Manager with The Bank of Montreal in Canada, Associate Analyst
with the structured finance group at Moody’s Investor Services in the UK,
and Editor for several financial trade magazines in the UK for both Thomson
Financial Publishing and Euromoney PLC (titles include Thomson’s trade
magazines “The International Securitisation Report”, and “Capital
Market Strategies”, and Euromoney’s “Asset Finance International”).
Brian recently joined the InvestorIdeas.com portal team as a Writer, Editor
and Research Associate.
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