Analyst Steven Kim at Citigroup points to six key positives for the group:
- Consolidation: The top 10 builders still only have a 15% share of the U.S. market, which means that the potential for mergers should keep a bid under the sector.
- No foreign competition: There are no low-cost rivals who can leverage cheap foreign labor to force price deflation. There's no Toyota (TM) of homebuilding.
- Big-box retailers: Stores like Home Depot (HD) have driven down the cost of building materials and lowered the expense of ownership, improving home values.
- No pension liabilities: Builders subcontract out most of their labor, so they're not afflicted by the health and retirement benefit woes of other major industries.
- Cash business: For the most part, builders receive cash from the mortgage lender right away after a transaction is complete. They don't finance their customers.
- Clean financials: Restructuring and other special accounting charges are uncommon in this industry, streamlining their balance sheets.
Citigroup's analysis suggests that only 10% of builders' land investments were negotiated in 2005 or later, at the peak of the cycle, and thus potentially at risk of write-offs.
|Ranking the Homebuilders |
|StockScouter rating||Price/Book ratio||P/E ratio||P/E: 5-year high||P/E: 5-year low||Market cap||Recent price|
|Brookfield Homes||9||3||4.7||19.7||3.3||$958 million||$39.70|
|Avatar Holdings||9||1.5||7.2||95.6||9||$576 million||$72.05|
|M/I Homes||8||0.8||5.9||11.1||4.5||$524 million||$38.10|
|KB Home||7||1.6||4.9||22.1||4.1||$4.6 billion||$52.57|
|D.R. Horton||7||1.3||6.8||13.6||4.3||$8.2 billion||$26.79|
|Technical Olympic USA||4||0.6||5||14.8||2.2||$560 million||$9.38|
|WCI Communities||5||0.7||6.6||13.4||3.1||$787 million||$19.30|
|Orleans Homebuilders||5||0.9||4.4||18.1||3.3||$255 million||$14.02|
|Standard Pacific||5||0.9||4.7||13.6||3.3||$1.6 billion||$26.99|
|Hovnanian Enterprises||5||1.2||5.6||19||3.5||$2.2 billion||$37.39|
|M.D.C. Holdings||3||1.2||6.2||13.6||3.7||$2.5 billion||$56.73|
|Meritage Homes||5||1.3||4.2||18.5||4||$1.2 billion||$49.47|
|Pulte Homes||3||1.3||7.1||13.3||4.9||$8.5 billion||$34.10|
|Toll Brothers||5||1.5||6.5||22.6||4.8||$4.9 billion||$32.96|
|Ryland Group||6||1.6||5.7||13.9||4||$2.3 billion||$54.06|
|Beazer Homes||5||--||5.1||13.5||4.4||$1.7 billion||$46.48|