The Earnings Scout: A Focus on the Homebuilding Industry

July 31, 2013

Earnings Scout is a proprietary analysis of the rate of change (the delta) in earnings trend expectations. This analysis is differentiated as it identifies divergence of stock price from the rate of change future expectations. The rate of change is a leading indicator of a catalyst for potential price change not measured elsewhere. Contact info@roulstonresearch.com to learn more on how they can create tailored reports so you can maximize your risk-adjusted returns.

  • The homebuilding industry in the S&P 500 consists of three companies: D.R. Horton, Lennar, Pulte Group.
  • The industry accounts for 0.11% of the S&P 500 index.
  • In 2012, the homebuilding industry significantly outperformed the consumer discretionary sector (104.39% vs. 23.92%) and the S&P 500, which returned 16.00%.
  • In 2013, the industry is now significantly underperforming the consumer discretionary sector (-8.73% vs. 25.41%) and the S&P 500, which has a total YTD return of 19.61%.

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  • All of the homebuilder’s underperformance in 2013 has come after our repeated warning that the industry was grossly overvalued.
  • Let us take the time to review our prior earnings analysis on the homebuilders.
  • Back in March 2013, the industry was still outperforming.
  • We cautioned about the decelerating rate of change to the homebuilder’s positive earnings estimate revisions as prices kept moving higher.

Homebuilding Industry Earnings and Price Trends in March 2013

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  • Something had to give, either earnings estimates were going to have to eventually go up or prices fall.
  • Our qualitative analysis on the group determined it would be the latter, and we were right.
  • Here is the current updated graph on how the rates of change to homebuilding earnings estimates are moving off of expectations.

Current Homebuilding Industry Earnings and Price Trends

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In our opinion, Ben Bernanke & Co. will need three things in order before they can pull an exit stage left.

  1. Improved employment picture
  2. Healthy financial sector
  3. Solid housing market
  • If all three of the above factors are humming, the economic recovery would have an increased chance of being sustained without the need for additional Fed support.
  • As for #1, jobs have been improving; albeit slowly, but improving,
  • As for #2, financials (i.e. banks) rocked in 2Q13 earnings season. The Fed can check this box.
  • As for #3, housing is much healthier today than two years ago. But, it will be tough for the Fed to leave the party early as housing trends have become steadily less positive over the past year.
3Q 2013 Homebuilding Earnings Estimates
Company

2Q13 Report Date

3Q13 Estimate

3Q13 Est. (90 days ago)

90 Day Estimate Change

D.R. Horton

7/25/2013

$0.40

$0.39

2.56%

PulteGroup

7/25/2013

$0.37

$0.40

-7.50%

Lennar Corp

6/25/2013

$0.46

$0.52

-11.54%

Source: The Earnings Scout

 

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