Double-digit Earnings Growth Belies Investors

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While revenues surged to all-time high levels for the nation’s largest homebuilders, industry analysts agree that the third quarter witnessed a transition.

Robert Curran of Merrill Lynch reports that year-over-year revenues rose 31% on average for seven of the industry’s largest publicly traded homebuilders during the quarter that ended September 30. Meanwhile, unit orders per subdivision slowed from an increase of 5% in July, flattened in August and decreased 5% percent in September, says Timothy R. Jones, managing director for Ryan, Beck & Co.’s Southeast Research Group.

Though much of the slowing relates to increases in mortgage rates, some of it can be attributed to production delays, says Jones. "In some cases municipalities have lost inspectors because of the tight labor market. In other cases environmentalists have been more active, but delays have become an industry problem."

Looking forward, Jones estimates that the year end backlog for 10 of the industry’s largest companies will be 16% higher going into 2000, despite a nearly 150 basis-point increase in rates for 10-year bonds. Indeed, says Jones, the homebuilding industry is in a much better position than it was in five years ago when rates for 10-year bonds rose to similar levels. The backlog for the same 10 companies fell 14% going into 1995.

"It doesn’t get much better than this year, and it is not going to get that much worse next year," note Jones, who remains incredulous at the very low, six-times earnings valuations in the stock market. "It’s just insane."

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