The majority of students hate the stress associated with bringing home their report card at the end of each school year. Of course, those students who do well, have a bounce in their step as they walk home, report card in hand.
What can public builders and private builders learn about their competition and their performance from this year’s Public Builder Report Card? What key insights does this year’s public builder report card highlight?
Before we dive in, let’s understand the methodology. There were 22 public home builders evaluated. Information obtained is only collected from each company’s SEC Form 10-K and Form 10-Q. Approximately 140 pieces of data are collected on each company by four interns from the Accounting, Business and Economics Department of Juniata College Huntingdon, Penn. This data allows for 200 calculations to be performed. Because companies report information differently, not all pieces of data or calculations are easily comparable. Once data is entered, each homebuilder is provided their numbers and calculations for review and correction prior to publication.
Here are ten key insights from this year’s report card.
Revenue Growth:On average, total revenues grew by 20.5% to $2.5 billion. The majority of this growth was driven by an increase in average sales price. Average sales price rose a whopping 31.8% to $488,000. The number of closings for public builders increased by 9.6% far in excess of the 1.9% in new home sales reported by the U.S. Census Bureau, indicating public builders continue to take market share from private builders.
Impairments: Impairments are, for the most part, a thing of the past. The average impairment this year among public home builders was down to $6.3 million. In 2011, the average public home builder incurred impairment charges of $100 million.Gross Margin: With home prices climbing by 31.8%, the average gross margin from home building operations earned by each company grew by 29.5% in 2014 to just over $500 million. The gross margin percentage grew by 80 basis points from 19.0% in 2013 to 19.8% in 2014.
Selling, General Administrative (SG&A): Given the significant increase in average sales price, one might have expected that public home builders would have been able to gain leverage from their selling, general and administrative overhead. This was not the case. Home building SG&A remained at 10.6% of home building revenues in 2014 compared to 2013.
HB Pre-tax: Total home building pre-tax income jumped 40.6% in 2014 a result of higher revenues, higher gross margins, and overhead as a percentage of revenues remaining constant. As a percentage of revenue, home building pre-tax income grew to 10.5% up 150 basis points from 9.0% in 2013.
Net Income: Surprisingly given all of the positive news, average net income fell 14.8% from $275 million to $234 million. The reason is that as the industry’s financial results improved, home builders no longer have the benefit of tax loss carry forward. In 2013, Pulte Homes enjoyed a $2.1 billion tax benefit. In 2014, Pulte incurred a tax expense of $215 million.
Return on Equity (ROE): It’s always interesting to compare return metrics. Average return on equity in 2014 was 11.7%. KB Home led all builders with an ROE of 68.9% as a result of a large tax benefit in 2014. Without such benefit, I was surprised that William Lyon Homes led all builders at 15.5%. I expected NVR would lead all builders; NVR came in a close second with an ROE of 15.4%, but this was down from 19.4% in 2013.
Land Owned & Year’s Supply: If you are a private builder, this may be the one metric that keeps you up at night. Public builders increased their year’s supply of lots controlled by one full year to 9.6 years in 2014 up from 8.6% in 2013.
Sales Velocity: This metric may tell more about consumer demand in 2014. The average sales per community per month remained constant at 2.1. I think this highlights the lukewarm increase in demand in 2014. While demand did increase, builders opened enough new communities to compensate.
Total Shareholder Return: Finally, given all of the success builders achieved in 2014, I was surprised that Total Shareholder Return (change in share price plus dividends) fell on average by 8.3%. The exuberance that investors felt towards the industry in 2013 moved stock prices higher. When the reasons for this exuberance did not materialize in 2014, stock prices fell.
It was a good year for public home builders from an operational perspective. Revenues grew, gross margins grew, profitability grew and their year’s supply of land grew. The only negatives were a result of a loss of large tax benefits that impacted after tax earnings and the air coming out investor exuberance.