Call it the Warren Buffett effect.
Homebuilder stocks rose Tuesday, after news that the investment icon's Berkshire Hathaway (BRK.B) -) (BRK.A) -) bought shares of D.R. Horton (DHI) -), Lennar (LEN) -) and NVR (NVR) -) in the second quarter.
DON’T MISS: D.R. Horton shares higher after Warren Buffett discloses stake in homebuilder
That led Morningstar to publish its analyses of three major homebuilder stocks.
D.R. Horton
Morningstar moat (durable competitive advantage): none. Morningstar fair value estimate: $120. Wednesday stock quote: $125.
“D.R. Horton is the largest U.S. homebuilder, with an extensive geographic footprint, wide product breadth, and affordable price point,” wrote Morningstar analyst Brian Bernard.
“Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.”
When it comes to pricing, “D.R. Horton has always been one of the more affordable homebuilders, at least compared with public peers,” Bernard said. “And the firm has clearly benefited from its pricing actions.”
In D.R. Horton’s latest quarter, new orders surged 37% year over year, with orders up by a double-digit percentage across all regions, he noted. That came as the new-order average selling price declined 8% year over year to about $381,000.
Lennar
Morningstar moat: none. Morningstar fair value estimate: $133. Wednesday stock quote: $124.40.
“We expect first-time buyers will be a key driver of future housing demand, and Lennar is well positioned to capture these potential buyers with its increased mix of entry-level homes,” Bernard said.
“Lennar controls an ample land supply, which affords it the ability to meet future demand while focusing on improving cash flows and maintaining a strong balance sheet.”
But “the company has shifted to a lighter land acquisition strategy,” he said. “It seeks to reduce the amount of capital tied up in land by purchasing smaller land parcels and relying more on options to acquire land on a just-in-time basis.”
Like D.R. Horton, Lennar benefited from charging lower home prices in its latest quarter, he said. Its average selling price for new orders fell 11% to $457,000. And new orders gained 0.5%, after a 10% decline in the prior quarter.
Toll Brothers
(TOL) -)
Morningstar moat: none. Morningstar fair value: $76. Wednesday stock quote: $81.20.
“Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry,” Bernard said. “Its premier land inventory and luxurious, customizable designs allow the company to charge average selling prices that lead its publicly traded industry peers.”
As a result, “we think Toll Brothers will capitalize on what we see as favorable long-term housing demand dynamics,” he said.
Caution: “[While] we think Toll Brothers can achieve positive economic profits in a healthy market, we expect competition and the company's more capital-intensive land acquisition strategy to restrain those profits,” Bernard said.
To be sure, “management is focused on moving to a lighter land strategy and has made substantial progress.”
Meanwhile, Toll Brothers reported “good” earnings in the latest quarter, with key performance metrics all exceeding management’s guidance, Bernard said.
Note to investors: Of the three stocks, only Lennar trades below Morningstar’s fair value estimate.
The author of this story owns shares of Berkshire Hathaway.
Get investment guidance from trusted portfolio managers without the management fees. Sign up for Action Alerts PLUS now.
