Homebuilding sector rises after Lennar and KB Home report earnings

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March 27, 2019 3:39pm NYSE:XHB

From Daren Fonda: Wednesday, despite reporting a mixed bag of first-quarter earnings.

Lennar (ticker: LEN), the nation’s largest home builder, reported earnings per share of 74 cents, missing consensus estimates of 75 cents. That was Lennar’s first earnings miss since the fourth quarter of 2017, according to FactSet. The company said that new order growth beat the high end of its guidance by 5%, while deliveries fell short, “primarily due to well-documented weather issues across the country.”

While revenues from home sales were up 36% compared to a year earlier, with unit growth up 31%, the results fell short of some analysts’ forecasts.

Credit Suisse analyst Susan Maklari had forecast 45% revenue growth from home sales and a 38% jump in units. Average sales prices increased by 4%, below her estimate for a 5% jump. The results would have been worse, she pointed out, if Lennar hadn’t ramped up buyer discounts and other incentives by four percentage points year-over-year, and two percentage points from the prior quarter–amounting to 5.8% of revenue.

Maklari wrote in a note that Lennar continued to “make strides towards its strategic initiatives,” including the sale of its brokerage business and the majority of its title insurance and retail mortgage businesses. The company also bought back $47 million worth of stock, helping lift earnings per share.

One positive sign is that order growth appears to be picking up. The company said orders increased 24%, year-over-year, beating her 17% estimate. The increase was robust across almost all geographic regions.

Nonetheless, she maintained her Neutral rating on the stock, writing that much of the benefits of Lennar’s efforts–including $380 million of synergies from its merger with builder CalAtlantic–are already reflected in its valuation. Her target price on the stock remained at $49.

Lennar stock was up 3.8% late Wednesday morning, to $51.61 per share.

KB Home’s (KBH) bottom line results looked a bit stronger. The company said it earned 31 cents per share, beating consensus estimates of 25 cents. But that earnings beat was driven by a lower tax rate and oustanding share count. Sales for the quarter missed consensus forecasts, coming in at $811.5 million, versus estimates of $831.8 million.

Analysts expect KB’s sales to be down slightly in 2019, coming in at $4.6 billion compared to $4.5 billion in 2018.

RBC Capital Markets analyst Mike Dahl increased his price target on the stock to $25 from $23, but he maintained his Sector Perform rating. While sales should pick up in the second half of the year, he wrote, he still forecasts a 5% decline in revenues for the full year, compared to 2018.

“Concerns regarding demand and affordability give us caution on order growth while the weaker environment will likely lead to increased price competition,” Dahl wrote.

KB Home stock was up 1.2% late Wednesday morning, to $24.38 per share.

Overall, the results from both builders indicate that demand seems to be perking up with the fall in mortgage rates this year. Rates on 30-year mortgages have come down from nearly 5% in late 2018 to about 4.3%. Home loan applications appear to be rising. Mortgage application volume jumped 8.9% last week, according to the Mortgage Bankers Association.

If rates stay at this level, or head lower, more buyers are likely to come back to the market. But a sales revival may already be more than reflected in the stocks, the reason why many analysts are sticking with their Neutral ratings.

The S&P 500 Homebuilders Select Industry index is up 22.8% this year. Both Lennar and KB Home have enjoyed the rally, with Lennar stock ahead by 31.4% and KB up 27% in 2019.

The SPDR S&P Homebuilders ETF (XHB) was trading at $38.49 per share on Wednesday afternoon, up $0.29 (+0.76%). Year-to-date, XHB has declined -12.86%, versus a 5.21% rise in the benchmark S&P 500 index during the same period.

XHB currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #32 of 42 ETFs in the Consumer-Focused ETFs category.

This article is brought to you courtesy of MarketWatch.

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