|
|
During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Forget Adderall. Traders now pop chia seeds to stay focused and energized
The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
Get Four
|  | JUNE 22, 2005
 INDUSTRY IN FOCUS By Stacy Trombino Builders Keep the Home Runs ComingWhile S&P's William Mack sees the current cycle in its seventh inning, he says Lennar, M.D.C., and others are still at the top of their gamesDespite talk of a housing bubble, demand for homebuilding has remained strong into the second quarter of 2005. Quarterly profits in this industry group came in ahead of Standard & Poor's expectations. And while U.S. housing-starts data for May, released June 16, were a little weaker than expected, the pace remains robust. "The data suggest that the housing market remains on solid ground," says David Wyss, Standard & Poor's chief economist. Companies that build new homes have made some impressive gains. Year-to-date through June 17, the S&P 1500 Homebuilding Index rose 27%, vs. a 0.8% rise in the S&P 1500, following a spectacular 36% rise in 2004. FUELING DEMAND. William Mack, the S&P equity analyst who follows homebuilders, maintains a positive investment outlook for the group. He says low mortgage rates have continued to encourage homebuying demand, and average price gains accelerated in the first quarter, resulting in margin growth across the industry. While Mack believes the current homebuilding cycle is closer to the top than the bottom -- "It looks as though we are in the sixth or seventh inning" -- he thinks strong demand for homes continues. More importantly, low long-term interest rates are underpinning demand (see BW Online, 6/22/05, "Housing Bubble -- or Bunk?"). Even if there were a large move to a higher yield on the 10-year Treasury note, which he believes is unlikely in the near term, homebuilders would still trade at "comfortable" historical averages, in Mack's view. BENEFICIAL RATES. Recent interest-rate friendly economic data should limit any short-term increase in mortgage rates, says Mack. He expects the benefits of these favorable borrowing rates will accrue to almost every homebuilder, pushing the group's average earnings multiple to about 9.5 times 2005 estimates by yearend. Mack believes the typical homebuilder's fundamentals remain quite strong, and that the growth he forecasts for the S&P 1500 Homebuilders Index will be met with higher overall valuations. Mack expects the group's fundamentals will continue to improve but at a more moderate rate after 2005, largely due to mortgage rates' likely upward trend from current levels. And what of earnings multiples in the longer term? Mack thinks they will "gently gravitate" upward. SENSITIVE INVESTORS. The analyst anticipates most of the stock-price appreciation in this group will be driven by fundamentals rather than multiple expansion. Mack projects the average homebuilder's valuation will remain in the high single-digits until peak earnings are achieved -- not earlier than 2006. As for profit growth, Mack sees an average earnings increase for the builders within his coverage universe of at least 30% in 2005 and 15% in 2006. However, because Mack thinks any widening in overall valuations will be kept relatively in check, as he believes investors are becoming increasingly sensitive to a potential cyclical turn, he says only some of the stocks in the group appear to be significantly undervalued. Which homebuilders does S&P favor? Mack has a 5 STARS (strong buy) opinion on Lennar (LEN ; recent price, $62), Standard Pacific (SPF ; $87), M.D.C. Holdings (MDC ; $81), and Beazer Homes (BZH ; $57). WIDE MARGIN. Stocks ranked 5 STARS are expected to post a total return outperforming the total return of the S&P 500 stock index by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. S&P carries a 4 STARS (buy) opinion on the shares of Hovnanian Enterprise (HOV ; $66) and D.R. Horton (DHI ; $37). Centex Corp. (CTX ; $69), Pulte Homes (PHM ; $83), Toll Brothers (TOL ; $101), and KB Homes (KBH ; $75) are each ranked 3 STARS (hold).  Trombino is a reporter for S&P Global Editorial Operations All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2005, Bloomberg L.P.Terms of Use | Privacy Notice |
Printer-Friendly Version
