> Homebuilders Could Fly High Again
>
> By Vito J. Racanelli
>
> After more than doubling in the 12 months ended in March,
> homebuilders'
> stocks sold off big time this spring amid worries that the Federal
> Reserve
> would raise interest rates later this year.
>
> The Dow Jones home construction group was the second best
> performing of all
> the industry groups. But with rate worries rising, sentiment
> turned
> negative on the stocks and they gave up a big chunk of their gains,
> falling
> much further than the broader market in recent months. (The group
> rallied
> by about 2% last week, but has given back some of its gains this
> week.)
>
> Now, however, interest rates have begun to slip again in the wake
> of more
> turmoil in Asia. Along with the strong economy and the buoyant
> housing
> market, that may make these stocks--many of which trade
> significantly off
> their 52-week highs--an attractive buying opportunity.
>
> "I don't see any chance of a sustained rise in U.S. interest
> rates," says
> Timothy Jones, an analyst at Southeast Research Partners and a 30-
> year
> industry veteran. Jones and other bulls on housing stocks think any
> hike
> would be limited to 25 to 50 basis points, which they maintain
> would have
> little effect on construction activity. (Some, like Michael Via, an
> analyst
> at Anderson & Strudwick, are even predicting rates will fall.)
>
> Meanwhile, backlogs and orders--which foreshadow earnings two or
> three
> quarters down the line--are up, Jones adds. "I continue to have to
> raise
> earnings estimates for the group," he says. While housing starts
> fell 2.3%
> in April from March and 2.5% in March from February, the drop was
> mainly
> in multifamily housing. (Unseasonably warm weather also inflated
> winter
> construction figures.) Meanwhile, April single family housing
> starts were
> up, as were permits, a leading indicator. The National Association
> of Home
> Builders' housing market index inched up to 68 in May from 67 in
> April,
> suggesting market conditions remain strong.
>
> Jones says he expects earnings growth of at least 15% this year
> among the
> major publicly traded home construction firms, far higher than the
> low
> single-digit earnings increases expected from the S&P 500. Among
> his
> favorites are Lennar (LEN) and D.R. Horton (DHI), where he projects
> earnings growth of 20% over the next two years.
>
> And both companies are selling at a discount to their growth rate.
> According to First Call, Lennar should earn $2.62 per share next
> year, up
> over 30% from this year; it sells at about 11x 1999 profit
> projections.
> Horton also trades at 11x 1999 earnings estimates, a discount to
> its
> expected profit growth of 17% from 1998.
>
> Some other analysts have come to believe the trends for the group
> are
> positive now that a rate rise doesn't appear to be in the cards.
> Mike
> Corelli, an analyst at Du Pasquier & Co., says he has become more
> positive
> about these stocks, in part because deflationary pressures from
> Asia have
> driven down the prices of commodities that are vital components for
> homebuilders. Lumber prices, for example, are down 25% from a year
> ago and
> copper has fallen some 35%. At least some of that is bound to be
> reflected
> in the bottom line of these companies.
>
> One of Corelli's favorites in the group is Oakwood Homes Corp.
> (OH), a
> producer of manufactured housing. (Unlike on-site builders,
> companies like
> Oakwood make modular homes components that are put together at the
> site.)
>
> The company stumbled earlier this year when it had to take a
> 21-cents-a-share charge for underestimating past loan prepayments
> and
> default rates among some of its customers. But in the last two
> years the
> company has moved to a "very conservative" stance that will
> preclude this
> problem in the future, he says.
>
> Corelli estimates Oakwood will earn about $1.83 a share this year
> (after
> the charge) and $2.33 next year--but could hit $2.40 to $2.50 a
> share next
> year if the recent acquisition of Schult Homes Corp. meets
> expectations.
> In 1997, the company earned $1.75 a share. At Thursday's close of
> $27 5/8,
> Oakwood trades at about 11.5x 1999 estimates, while other
> manufactured
> housing companies sell at 13x-14x 1999 earnings projections.
>
> As if anticipating good news, some Oakwood insiders--who were
> selling
> shares between November and February--are now nibbling at the stock
> once
> again. In April, Oakwood director Lanty Smith purchased 10,000
> shares at
> $29.25 to $29.50 a share.
>
> In the manufactured housing group, analyst Michael Via likes
> Cavalier
> Homes (CAV), an Addison, Alabama-based small cap. An inventory glut
> in the
> Southeast that led to a 2.8% decrease in U.S. manufactured housing
> shipments last year "is being cleared out," he says. (Indeed, in
> the most
> recent report, the Southeast showed the most robust housing sales
> of any
> region.) Manufactured housing trends have improved this year, with
> shipments up about 3.2% in 1998 versus a 2.8% drop last year. From
> 1992 to
> 1996, shipments rose 72%.
>
> The company's recent acquisition of Belmont Homes not only doubled
> its
> size but also took out one of its main competitors, and Cavalier
> will begin
> to show up on institutional radar screens, he said. Cavalier
> settled
> Thursday at $11 per share, or about 12 times First Call's consensus
> 1998
> estimates of 93 cents per share and at nine times estimates of
> $1.25 per
> share in 1999.
>
> Those low multiples--and the lessening threat of a rate hike by
> the
> Fed--are beginning to make these stocks appealing to investors once
> again. |
