The home construction industry is not necessarily poised for resurgence until 2011 or later. What this means for construction companies is even though a construction 'bottom' might be have been reached financially, the signal to current and potential investors may be more of a medium term buy in at least one of the companies discussed below.
However, there is no rush to move into this industry given the continued decline in home prices, negative GDP growth, declining CPI, slight deflation, rising unemployment etc. Simply put, the rebound in the home construction industry seems more like a leveling off than a building stampede.
When assessing a construction rebound it is helpful to consider the numbers behind the forecast. For example, are construction on rental property buildings higher than new homes? or is commercial construction on the rise? Monthly construction permit applications and both regional and national mortgage origination numbers as well as housing prices may also be indicative of future housing market trends.
The following list includes 3 construction companies that may have medium or long-term potential based on financial statistics before any real estate market rebound. The first of these companies is better positioned to thrive, and expand in whatever circumstances the market brings according to the information provided below. The second and third companies listed are better than several other home-builders in terms of some of their financial fundamentals.
Despite these companies relative strength compared to other home construction companies, they also seem to have experienced considerable financial obstacles despite the size, current ratios, and strategy they are taking to deal with the wake of the housing markets large loss.
Additional home construction companies such as MDC Holdings and others listed above may also be potential construction recovery candidates, however if existing financial information is any indicator, the following companies may be better able to endure and benefit from a housing rebound in the long run.
• NVR Inc. (NVR)
NVR, Inc. has a Moody's Baa3 credit rating of investment grade with moderate risk. Given the circumstances in the housing market, that is pretty good. Also, the company has used the market down time to trim liabilities down by around 45% between 2006-2008, 1Q 2009 liabilities are also 10% lower than Q4 -2008. NVR has continued to maintain a positive retained earnings throughout the housing market crisis indicating strong management and fundamentals, both key to future performance.
• PULTE HOMES, INC. (PHM)
The Pulte Homes, Inc. acquisition of Centex Corporation can only mean two things 1) The company plans on building a lot or 2) The company has overextended itself. Pulte Homes, Inc. had a Moody's credit rating of Ba2, however is under review for a downgrade, probably due in part to the merger and related expenses. Even so, if the company survives, it will be a contender.
• TOLL BROTHERS (TOL)
Toll Brothers is a mid-cap company that has a high asset to liability current ratio in relation to other large homebuilders. It also has significantly reduced its liabilities over the last 4 quarters. Moreover, Toll Brothers revenue declines between Q1 2006-Q1-2008 are approximately 50%. While this is high, it is low in comparison to Lenar Corporation near 72% revenue decline for the same period, 73% for KB Home and 56% for Pulte Homes Inc. Toll Brothers has demonstrated the ability to move toward lean operations which can pay off in market upswings.
In the United States and at the time of writing this article, beginning of Q3 2009, new home construction had not increased so much as to consider the construction market in a rebound. Moreover, a few residential construction companies are still in business despite the massive economic damage to the housing industry by the 2008 financial crisis. The fact these companies still exist at all is some testimony to their endurance and includes big name home-builders such as Toll Brothers (TOL), Lenar Homes (LEN) in addition to Pulte Homes Inc. (PHM) which is merging with Centex Corporation (CTX), MDC Holdings Inc. (MDC). Others include, DR. Horton Inc, (DHI), Beazer Homes USA Inc (BZH), NVR Inc, (NVR) and The Ryland Group Inc. (RYL) to name a few.
Source: http://finance.yahoo.com
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