TOL, SPF, NVR: 3 Undervalued Housing Stocks With Potential To Become Superstars

TOL, SPF, NVR: 3 Undervalued Housing Stocks With Potential To Become Superstars
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Housing statistics continue to amaze with resilience. According to the numbers released by the National Association of Realtors, seasonally adjusted index for pending home sales rose 1.5 percent during March to 105.7. This is the highest level for the index in three years. Steady job additions and historically low mortgage rates are some of the factors fuelling the traffic of buyers. This is fuelling a long standing rally in housing stocks as well which has taken prices of  companies such as Toll Brothers Inc (NYSE:TOL), Standard Pacific Corp. (NYSE:SPF), and NVR, Inc. (NYSE:NVR) to high levels. However, these stocks are still not overpriced and could take leadership position in the next leg of rally. Here is how:

TOL, SPF, NVR: 3 Undervalued Housing Stocks With Potential To Become Superstars

Pennsylvania based Toll Brothers Inc (NYSE:TOL) has a price by book value ratio of just 1.8, lowest among its peers. The stock has seen wild movements in the last six months and has found strong momentum again on its journey to north. The company is adequately levered but not excessively laden with pie of debt. Currently priced at 12 times its earnings, the stock is reasonably placed but does not seem to factor the robust revenue growth we have seen in recent quarters. In the first quarter ended January 31, the company posted a 31.9 percent growth in revenues to $424.6 million. As a result, the company posted a profit of $4.4 million, compared to a loss of $2.8 million. The results came slightly below street expectations which caused selling pressure; however, it is worth noting that the top line growth is intact – enough for analysts at Barclays to up the price target to $41 and rating to overweight.

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Earnings potential almost free

Like most other home builder stocks, Standard Pacific Corp. (NYSE:SPF) has also seen a sharp appreciation in its stock price. Having gone up 28 percent so far in the year, the stock seems to have lost some of its potential in terms of future earnings. However, it still trades at a price earnings multiple of 7.3 which is certainly not very high. Another multiple indicating tremendous undervaluation is the price by book value ratio which is currently at 1.55. This means the company’s valuation is at a premium of 55 percent to fair value of its hardcore assets. Given the way stock prices have gone up in recent months, this is not very high and almost feels like the business is going at net asset value. For 2012, the company posted vastly improved financial results. Its revenues grew over 40 percent to $1.26 billion while gross margin improved to 19.7 percent from 18.4 percent in 2011. As a result, profitability stood at $531.4 million. There is little evidence so far to suggest that this trend of improved financial performance will be disrupted in 2013.

NVR, Inc. (NYSE:NVR) – a homebuilder which offers homes under Ryan Homes, Fox Ridge Homes, and Rymarc brands – has been a steady performer with a 33 percent gain in stock price over the last 12 months. The rally lost some of its momentum as the stock dropped 5.5 percent in the latest month. However, it may be a boon for investors actively looking for value. What caused the recent drop is also interesting – the company missed analysts’ expectations even after posting a 74 percent growth in net income to $35 million for the quarter ended March 31. Currently priced at 13.9 times its forward earnings, the company has a low debt equity ratio of 0.39. Another noteworthy factor which is like to drive stock price is the company’s top line growth which maintained its momentum despite a tough quarter. Revenue jumped to $770.3 million during the quarter, up 28 percent.

As long as homebuilders continue to demonstrate revenue growth, prospects of boosting bottom line remain bright and these companies have just showed they are capable of maintaining higher topline.

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