By Wyatt Kash. Most big home builders have to be pleased with the sales and earnings figures showing up in their year-ending financial reports. Better yet are advanced order figures indicating that despite some mounting trouble spots, sales prospects look remarkably strong for the year ahead.

Too bad "great" results are still not "good enough" for investors in publicly traded home builders. It seems investors remain too shell-shocked these days to appreciate a good growth story when they see one. That's what more than a few CEOs had to be muttering to themselves during quarterly conference calls to Wall Street last month and again in Las Vegas as the industry gathered amidst overwhelming evidence that home building continues to flourish in a virtual sweet spot within the U.S. economy.

It would seem home builders have a good case. According to consensus estimates from analysts, earnings per share forecasts for the most recent fiscal quarter, compared to a year ago, unofficially show big builders are growing dramatically (see chart).

Past performance is no guarantee of future results, as the disclaimer goes. It's true, many builders are enjoying record results. However, the prospects for continued growth are hardly dimming. Advanced orders among nine builders tracked by one analyst, Jim Wilson, of Jolson Merchant Partners, are up 35 percent. So why are shares trading at six times 2003 earnings projections compared to the historical average of 10, and the S&P multiple which was averaging 29 as we went to press?

Top 10

Earnings Growth


Centex Corp. 39% $2.14
Lennar Corp. 33% $3.09
Pulte Homes 33% $2.65
D.R. Horton 5% $0.66
KB Home 25% $2.53
The Ryland Group 20% $1.93
NVR 24% $8.85
Beazer Homes USA 9% $2.68
M.D.C. Holdings 12% $1.94
K. Hovnanian Enterprises 62% $0.97
Source: First Call, Thomson First, company reports

Chalk it up to the usual concerns: inflated housing prices, tighter land supplies, and mostly investor myopia, which slavishly holds to the dictum that a hint of higher interest rates can only mean bad news for builders. All belie the underlying strength in housing demand, continued product and process innovations, acquisitions, and the bright prospect for financing that will sustain growth for home building. It's times like these when certain executives have to wonder whether being publicly held is worth the trouble. No one ever said it was easy being a CEO. Then again, it hasn't been much fun being an investor lately either.

Photo: Katherine Lambert

Few people are likely to cast pity upon home building chieftains; most are enjoying levels of growth many S&P 500 companies would envy, ample cash war chests for expansion, a market where demand continues to outpace supply, and a fertile playing field where no single player holds more than 2 percent of the total market share. Compared to most industries, this is an exhilarating time to be positioned at the helm of a well-run home building company. With that said, there is no question it's not getting any easier to build large numbers of houses. Securing lots affordably remains the industry's Achilles heel. And builders are unlikely to escape the impact of staggering state and budget cuts this year. If builders were wondering where all their land use and development fees went last year, just wait and see what unfolds this year.

If investors are shy for the moment about investing in home builder stocks, the demand for what home builders are actually selling is real and sustainable and that is what matters. Sooner or later, investors will come to appreciate that home builders -- and the companies that they are building -- are in fact still one of the underappreciated growth stories in America today.

Wyatt Kash



Published in BIG BUILDER Magazine, February 2003