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Buy Housing ETFs on Upbeat Earnings, Existing Home Sales Data

Zacks Equity Research
Updated

The housing sector appears in a great shape as evident by the recent volley of decent data points and upbeat earnings. Spring has been really good for the sector as existing home sales rose 5.1% registering gains in all the four regions in March and breezing past economists’ projection of a 3.5% rise. An improving supply scenario, a healing job market and a still-low interest rate environment made this recoil possible.
 
The sector also falls in the top 41% in the Zacks Industry Universe.  If this was not enough, housing earnings released lately also point to a surge in the key spring selling season. Below we peek into the assuring earnings picture of the sector (read: Are Housing ETFs Ready to Ride on Spring Selling Season?).
 
Inside Housing Earnings
 
D.R. Horton (DHI), one of the biggest and well-known homebuilders in the nation, came up with solid fiscal second-quarter 2016 results on April 21 before the bell and raised its profit guidance. The housing company’s earnings and sales beat the respective Zacks Consensus Estimate. Shares inched up 1.15% in the key trading session of April 21 (read: Q1 Earnings Appear Dull: ETFs & Stocks to Bet On).
 
D.R. Horton’s adjusted earnings of $0.52 per share in the second quarter of fiscal 2016 came ahead of the Zacks Consensus Estimate of $0.47 and grew 30% year over year driven by strong profits and higher home sales.
 
Homebuilding revenues of $2.7 billion increased 15.5% while total revenue (homebuilding and financial services) of $2.77 billion beat the Zacks Consensus Estimate of $2.68 billion. Home sales also expanded 15.8% year over year to $2.69 billion backed by both pricing gains and higher home deliveries. Net sales orders increased 10%.
 
While the company retained the fiscal 2016 revenue guidance, it raised the expectation for pre-tax profit margin to a range of 10.7% to 11.2% from its previous expectation of 10.5% to 11.0%. SG&A ratio is now expected within 9.0–9.2%, which is better than 9.2–9.4% projected earlier.
 
Another construction company PulteGroup Inc. (PHM) also surpassed the Zacks Consensus Estimate for both earnings and revenues in the first quarter of 2016, for the second quarter in a row. First-quarter 2016 adjusted earnings of $0.24 per share surpassed the Zacks Consensus Estimate of $0.19. Moreover, reported earnings increased 60% from the year-ago quarter on the back of higher home sales and lower share count. Its revenues of $1.43 billion (up 26.6% year over year) beat the estimate of $1.36 billion.

ETF Impact

The bullishness over such an important homebuilding stocks like DHI and a overall beat from PHM should shower gains on the broad housing ETFs. These include SPDR S&P Homebuilders ETF (XHB), iShares U.S. Home Construction ETF (ITB) and PowerShares Dynamic Building & Construction Fund (PKB) with a Zacks ETF Rank #2 (Buy) (read: 5 ETFs to Buy for Q2).

DHI has 4.46% weight in XHB and takes the first spot in ITB with a 12.01% weight. PHM takes 4.37% of XHB and 7.71% of ITB. There is another product, UBS ETRACS ISE Exclusively Homebuilders ETN (HOMX), the underlying index of which invests 9.91% of its weight in D.R. Horton and 8.64% in Pulte Homes. HOMX has a Zacks ETF Rank #3 (Hold).
 
Bottom Line

DHI has a Zacks Rank #3 (Hold) and a Growth and Value score of ‘B’ each while PHM has a Zacks Rank #3 but a Value score of ‘B’ and Growth score of ‘F’. So, if investors find it tough to decide whether they should go for these stocks or not as investing matrices are mixed, they can easily bet on the afore-mentioned top-rated ETFs.
 
Agreed, the housing starts and permits data for March were underwhelming. But several analysts are downplaying this reading and are hopeful of an ‘April rebound’. Thus, investors who believe that companies like D.R. Horton can establish a wining trend ahead can invest in housing ETFs like XHB and ITB. Investors can always go for a single stock pick, but a basket approach will safeguard them against stock-specific volatility and gives industry-wide exposure.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
 

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
D R HORTON INC (DHI): Free Stock Analysis Report
 
SPDR-SP HOMEBLD (XHB): ETF Research Reports
 
ISHARS-US HO CO (ITB): ETF Research Reports
 
PWRSH-DYN BLDG (PKB): ETF Research Reports
 
E-TRC ISE EH (HOMX): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report