Three Major Home Builders To Own Ahead of An Expected Housing Recovery Next Year

Housing is one of the darkest corners of the economy, and it continues to stagger under the industry’s mountain load of woes. The beleaguered industry has become a pariah on Wall Street and investors remain fearful of putting their money in anything akin to, or that has something to do with housing.
The industry continues to suffer from the “overly exuberant ways of the middle years of the last decade — a period of overspending on the part of builders, banks and speculative buyers that has left the industry in shambles,” says William G. Ferguson of investment research outfit Value Line in a report on the home building industry.
To be sure, housing stocks are at the bottom of the totem pole in investors’ set of priorities, particularly in this struggling economic rebound, which has driven the stock market to deep lows and extreme volatile swings. But that’s not to say that there aren’t any stock opportunities to snap up in anticipation of a recovery, finally, that some pros expect will happen by next year. They figure that at least three home builder companies will post profits by 2012, as start they ramping up sales starting in the fourth quarter of 2011.
True, home builders continue to be plagued by too many distressed properties that are now on the market at prices way below their original listed prices, thus blocking the sale of new homes. The number of unsold homes currently stands at 3.72 million units, equating to more than nine months supply, based on the current slow sales pace, according to Ferguson. That’s the reason why not many analysts favor the home builder stocks.
Still, there is a view, if a minority one, that some home builders are on a comeback track and are likely to post good revenue numbers and tidy profits by next year. Topping that list: NVR (NVR), whose stock is trading at $596 a share, way down from $84 in January 2011: Toll Brothers (TOL), whose shares are down to $16 a share from $22 earlier in the year; and D.H. Horton (DHI), whose stock is selling at $9.95 a share, down from $13 in January.
Standard & Poor’s on Aug. 5 upgraded NVR, one of the largest home building and mortgage banking companies in the U.S., to a buy rating from a hold. NVR builds single-family detached homes, townhouses, and condominium buildings. “NVR is well managed and doesn’t make big bets on large land acquisitions or building speculative homes without buyers,” says S&P analyst Kenneth Leon. He notes that according to Capital IQ, the consensus earnings estimate for NVR has edged up a tiny bit to $26.85 a share from $26.70, but the forecast for 2012 is much higher — $38.15 for 2012 — “in an expected housing recovery.”  Revenue, according to consensus projections are expected to decline 7% in 2011, but should turn and grow by 14% in 2012, notes Leon. NVR has “ample liquidity,” notes the analyst, with cash of $927 million and only $75 million in notes payable as of June 30, 2011.
Anticipating an improving housing market in the mid-Atlantic and Northeastern states, were most of NVR’s properties are located, Leon recommends buying NVR shares for “its strong competitive position.”
Toll Brothers, which builds luxury homes in the U.S., was also upgraded recently by S&P, to a strong buy from a buy, as it expects the company to break even in fiscal 2011 (ending Sept. 30) and then post a profit of 40 cents a share in fiscal 2012. Toll also has a strong cash position, with $1.2 billion and no debt maturing before 2013. Leon has a 12-month target for the stock now trading at $16 a share, of $24.
Source http://www.forbes.com/