Housing/BLDR comments
Reading the housing data tea leaves for Builders FirstSource shares
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Rising delivery levels and home builder focus on asset lite models are nice positives
*Lennar LEN sees higher production levels ahead and reiterated its asset lite business model focus
*The jump in non-seasonally adjusted May single-family housing starts QTD bode well for BLDR and these three other portfolio holdings
Earlier this week, Lennar LEN and KB Home KBH reported third quarter results with favorable year over year home deliveries and guidance pointing to improving quarter over quarter results ahead. This supports our recent decision to start a position for the portfolio in Builders FirstSource BLDR . Our thesis for BLDR shares centers on improving housing demand over the next 12-24 months as the Fed implements a rate cutting cycle and job creation remains healthy. Complimenting that is Builder leaning more into higher margin, value-dded products that should bolster its relationship with well placed home builders, including many of the large public ones. Helping that initiative, home builders are embracing strategies to reduce construction cycle times as they focus on design simplification to deliver efficiency enhancements to their production schedules. That should help Builder grow its dollar content per home, a strategy we very much like.
Our goal is to build up the portfolio’s exposure to BLDR shares, and while tempting to do this week, we are seeing lower than usual trading volumes due to the mid-week holiday.
Lennar and KB Home
During its second quarter, Lennar delivered 19,690 homes, up from 16,798 in the prior quarter and 17,074 in the year ago quarter. The company sees another sequential step up to 20,500-21,000 in the current quarter compared to 18,559 in the year ago quarter. Helping fuel that outlook, new orders booked during the May quarter soared 19% to 21,293 homes and Lennar started construction on 21,400 homes, 21,300 of which were sold during the quarter. During its earrings call, Lennar management reiterated its move to an asset light and engineered business model, which speaks to Builder’s focus on value added products.
Turning to KB Home, for its May quarter, it delivered 3,523 homes compared to the 3,037 delivered during the prior one. New orders clocked in at 3,997 homes for the May quarter, a sizable jump from 3,323 in the prior one. Parsing KB’s revenue guidance against its expected average sales prices implies deliveries between 3,425-3,630 for the current quarter, which at its midpoint is little changed compared to the recent quarter and down roughly 4% year over year.
Fortunately for Builder, Lennar is not only the second largest public US home builder behind DR Horton (DHI), both are top 10 customers for Builders FirstSource, while KB Home, does not crack that list.
May Housing Starts
With more than 70% of BLDR’s revenue tied to the single-family housing market and the balance split evenly between the multi-family housing market and the repair and remodel market, the figures to focus on in the May Housing Starts report are those for the single -family housing market. Those starts fell 5.5% compared to April, coming in at 982 on a seasonally adjusted basis.
When we look at that May data on a non-seasonally adjusted basis, single-family housing starts rose 19.4% year over year and was on par with April. Quarter to date, non-seasonally adjusted housing starts are up 20% compared to the first two months of Q1 2024.
That data along with the positive commentary from Lennar and to a lesser extend KB Home support our positive stance on BLDR shares. It also supports our stance on United Rentals (URI), Vulcan Materials (VMC), and Waste Management (WM) shares.
Economic impact
Stepping back a bit, the headline data for the May Housing Starts data and the May Retail Sales data out earlier this week will point to the economy slowing, but also support the view inflation progress continues. That puts us one step closer to potential rate cuts, a positive for BLDR shares, but we still have many data steps to go. We continue to think we will see at least one rate cut late this year, but the more “good data” we get on the inflation front we could see the odds tip toward more than one.
