Home builders slide in soft market

Shares of U.S. home builders slid on Friday after market leader D.R. Horton Inc., The USA’s largest home builder, slashed its forecast and a report showed consumer confidence was eroding.

The Dow Jones U.S. Home Construction Index, a barometer for home-building stocks, was 4.9 percent down at 570.02. It hit a two-year low and has lost half its value since peaking a year ago.

Yet, the drop came as no surprise to investors, who had for the past few years resisted awarding home-builder stocks higher valuations, despite pleas from the companies themselves.

"This means that investors have anticipated that earnings for the companies would come down," said Victory Capital Management analyst Michael Koskuba.

For about the past three years, as they repeatedly turned in double-digit profit growth, U.S. home builders complained the stock market did not value them fairly, with their average price-to-earnings ratio hitting only as high as about 9.6.

And over the past two years, the average P/E of large U.S. home builders was 7.34, about half the S&P 500's P/E of 15.95.

"Essentially investors thought that earnings would come down for these companies," Koskuba said.

The large, publicly traded home builders argued they were no longer cyclical stocks. They said they had grown so big that when the market soured, they could increase their earnings by taking market share away from the smaller private builders.

But investors didn't buy the theory.

"Although they were posting extremely high growth for that five-year period, they were not afforded market multiples because in the back of investors' minds was always the fact that home building was cyclical," Koskuba said.

Because investors never pumped up the P/Es, the fall hasn't been as dramatic, and the average for the top home builders is now about 4.85.

Horton shares fell as much as 11 percent to a two-year low, and were down 7.2 percent at $21.21 in late Friday trading. It was among the top losers on a down day for New York stocks.

Following Horton's announcement late on Thursday, on Friday morning the University of Michigan's preliminary July reading on consumer sentiment was 83.0, down from June's 84.9. It was lower than the median forecast of Wall Street economists polled by Reuters for a reading of 85.5.

Among U.S. builders, Meritage Homes Corp. (MTH.N: Quote, Profile, Research) shed 7.7 percent to $38.85, and Centex Corp. (CTX.N: Quote, Profile, Research) fell 4.6 percent to $45.20. Pulte Homes Inc. (PHM.N: Quote, Profile, Research) dropped 3.9 percent to $26.95 and Beazer Homes USA Inc. (BZH.N: Quote, Profile, Research) lost 5.5 percent to $38.57.

In the options market, defensive trading is being seen throughout the housing sector, with increasing put volume in Toll Brothers Inc.(TOL.N: Quote, Profile, Research), Beazer, The Ryland Group Inc.(RYL.N: Quote, Profile, Research) and Pulte, said Frederic Ruffy, analyst at Optionetics, a California-based options education firm.

Investors often turn to equity puts, which give the right to sell the stock at a preset price and time, to protect existing stock holdings or bet on further weakness in a stock.

"At some point they will be attractive again," Koskuba said. "But as long as the numbers keep going down, investors are still scared of going back in."

Source: Reuters New York