The homebuilding space has been on a tear, starting 2015 on steady economic growth, a healing job market, growing consumer confidence, moderating home prices and, of course, with low interest rates prevailing in the U.S. To add to the excitement, President Barack Obama recently announced plans to cut premiums on mortgage insurance to encourage home buying among first-time buyers and a host of housing stocks came up with impressive earnings this season.
With the earnings season warming up, investors seeking to ride out the latest housing wave would definitely like to know about the earnings performance of related companies. For them, we have highlighted the numbers of some sought-after housing companies that reported recently.
Quick Glance at the Sector Earnings
Most recently, PulteGroup (NYSE:PHM) came up with fourth-quarter 2014 adjusted earnings of 43 cents per share which beat the Zacks Consensus Estimate of 41 cents by 4.9%, though earnings were down 24.6% year over year on soft margins. Pulte’s total revenue of $1.82 billion was up 9.6% year over year, and surpassed the Zacks Consensus Estimate of $1.78 billion by 2.3% thanks to a higher number of homes delivered and increased pricing.
The stock gained more than 6% in the key trading session post earnings. In fact, Pulte’s earnings acted as a cornerstone for the entire sector and lifted the most of the housing stocks on the same day.
One of the sector bellwethers, D. R. Horton (NYSE:DHI)’s sales climbed 38%, earnings expanded about 8.3, gross profits grew 21.6% and net sales orders rose 35%. D. R. Horton’s adjusted earnings of $0.39 per share in the first quarter of fiscal 2015 beat the Zacks Consensus Estimate of $0.35 by 11.4% while its revenues of $2.25 billion surpassed the Zacks Consensus Estimate of $2.11 billion by 6.6%. This optimistic result gifted the stock with around 7.5% stock gains (as of January 29, 2015) since it reported earnings on January 26.
Despite soft margins, Lennar Corporation (NYSE:LEN) delivered a strong performance yet again, beating the Zacks Consensus Estimate on both lines in Q4 of 2014. Lennar, which reported on January 15, reported 10.3% positive surprise and 46.6% year-over-year expansion in earnings on an increase in homebuilding revenues. Its total revenue of $2.58 billion beat the Zacks Consensus Estimate of $2.56 billion by 0.8% and year-over-year sales by 34.4%. Post earnings, the stock gained about 8.9% (as of January 29, 2015).
There is bearish note as well. While several have outstripped the Zacks Consensus Estimate on both lines, players like Toll Brothers, Inc. (NYSE:TOL) missed earnings expectation and reported sluggish margins in the fourth quarter of fiscal 2015. Another company NVR Inc. (NYSE:NVR) also fell shy of the Zacks estimates on both lines.
Barring these cases, the underlying fundamentals of the industry have been decent. In fact, the volley of upbeat releases should invoke investors’ optimism prior to the all-important spring selling season. Per Bloomberg, companies are offering deals on new houses to lure buyers and enhance sales. All these have contributed to the positive vibes in the homebuilder ETFs of late.
ETF Impact
The sudden bullishness over such an important sector caused a rally in the broad housing ETFs as confusion appears to fade in the industry. Companies including D.R. Horton and Pulte expressed optimism about the activities in the upcoming quarters overruling rate hike fears.
All the afore-mentioned stocks have decent weights in the ETFs like SPDR S&P Homebuilders ETF (NYSE:XHB), iShares U.S. Home Construction ETF (NYSE:ITB) and PowerShares Dynamic Building & Construction Fund (NYSE:PKB). These ETFs are discussed in detail below:
XHB in Focus
The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund manages about $1.63 billion in assets, and the fund charges 35 bps in fees per year from investors.
In total, the fund holds about 37 securities in its basket with none holding more than 3.61% of total assets. XHB has added about 6% in the last two weeks and 2.6% so far this year.
ITB in Focus
This fund provides a pure play to the home construction sector by tracking the Dow Jones US Select Home Builders Index. It holds a small basket of 39 stocks and is heavily concentrated on the top 10 holdings with more than 50% of total assets. LEN gets the top priority in the portfolio with about 10.6% of focus followed by DHI (9.10.5%) and PHM (9.3%). The fund charges 43 bps in fees and expenses. The product is rich with AUM of nearly $1.67 billion. The ETF was up 5.1% in the last two weeks.
PKB in Focus
This product follows the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. The fund has managed assets worth $51.9 million while it sees light volume, and net expense ratio comes in at 0.63%. The product is somewhat concentrated on the top 10 firms at about 50% of total assets. PKB was up 4.5% in the last two weeks.
Bottom Line
Homebuilding and construction has been a strong performer this earnings season. Potential rate hike worries seem to be priced in at the current level. As a result, the near-term outlook for the sector appears decent.
If you believe that this case will hold true, consider the aforementioned ETFs for some quality exposure to this corner of the investing world as you can always rule out company-specific risk through the basket approach.