Are US Homebuilder Stocks About to Go Vertical?

US homebuilder stocksOn the whole, the homebuilding industry is the United States is doing well.

The gradual growth in the economy, the strengthening labor market, and the continued low interest rate environment are all strong tailwinds giving a boost to the industry. This has generated high levels of growth for the major U.S. homebuilder stocks, including Lennar Corp. (NYSE: LEN) and KB Home (NYSE: KBH).

But not all is well. PulteGroup (NYSE: PHM), the third-largest homebuilder in the country, is caught in a tug of war between its founding family and its current CEO over the future direction of the company.

While Lennar and KB Home are riding the housing wave, PulteGroup is missing out.

Economics Remain Solid

The key economic indicators for homebuilding in the U.S.  ̶  unemployment and financing  ̶ remain attractive and have boosted U.S. real estate.

From a long-term perspective, home values and homebuilding activity are up in many parts of the country. To be sure, homebuilding activity has slowed somewhat very recently  ̶  U.S. housing starts fell more than expected in March  ̶  but things are much better when compared to the levels seen during the financial crisis.

In February, single-family starts reached their highest level since October 2007. Also in February, permits for the construction of single-family homes grew to an eight-year high.

Other housing-related data points generally support the view that U.S. real estate continues its gradual, albeit unspectacular, recovery since the depths of the Great Recession.

Homebuilders Perform Well

Lennar and KB Home each had a great year in 2015. Lennar grew revenue and earnings per share by 22% and 23%, respectively, for the year. Deliveries rose 16% while new orders rose 14%, indicating continued strength in the homebuilding industry.

KB Home’s revenue increased 23% to $2.91 billion for the year. Home deliveries rose 14%, and average selling price rose 8%.

By and large, the strong momentum has continued into 2016. Lennar’s revenue grew 21% in the first quarter, with deliveries and new orders both posting double-digit year-over-year growth.

KB Home increased revenue by 17% and deliveries by 23% in the first quarter.

But PulteGroup has been a notable underperformer. Revenue increased just 2% in 2015. The company managed to squeeze out 7% earnings growth per diluted share, but that was mostly due to steep cost cuts. For instance, KB Home cut selling, general and administrative expenses by 11% last year.

Internal Strife

Frustrated at the prolonged underperformance when stacked against its competition, the simmering discontent at PulteGroup recently boiled over.

Earlier this year, the battle between founder William J. Pulte and Chairman and Chief Executive Richard J. Dugas Jr. went public. The company’s founder issued a letter to the board of directors demanding the CEO’s resignation, for what he viewed as “lack of performance and repeated bad decision-making.” The conflict sprang from the differing views of the various parties over how to steer the company going forward.

Grievances held against the CEO included the relatively low levels of investment in land and personnel, steps that PulteGroup’s competitors have taken and which have fueled their growth in recent years.

In addition, Dugas was criticized for moving the company from Bloomfield Hills, Mich., to Atlanta, Ga., which PulteGroup’s founding family believed led to the loss of “irreplaceable homebuilding talent.”

The founding family eventually got its way. In April, PulteGroup announced Dugas will retire from his roles as chairman and CEO at the company’s May 2017 annual shareholder meeting.

The Bottom Line for US Homebuilder Stocks

The current environment of low unemployment, rising home values and historically low interest rates should give the major homebuilders all the tools they need to succeed. While Lennar and KB Home have indeed capitalized, PulteGroup did not perform nearly as well as its industry peers in 2015.

Now that PulteGroup has reshuffled its management team, there is hope that the company will perform better moving forward.

But for investors, why take that chance?

Lennar and KB Home have established themselves as industry leaders, meaning those two are the best buys among the homebuilder stocks.

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Published by Wyatt Investment Research at