Why Home Depot Stock (NYSE: HD) Rallied While Homebuilders Fell

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The Home Depot Inc. (NYSE: HD) reported third-quarter business results on Tuesday and its management cited improved housing demand for their solid sales and earnings growth, particularly in the U.S. market.

Similarly, homebuilders Beazer Homes USA Inc. (NYSE: BZH) and D. R. Horton Inc. (NYSE: DHI) reported fourth-quarter earnings Monday, which, according to each company's management, reflected a continued U.S. housing market recovery.

Despite improved earnings for fiscal 2012 and a positive outlook for fiscal 2013, shares of Beazer and D.R. Horton were off sharply in afternoon trading on Monday, with BZH down about 17% and DHI 6%. They recovered slightly by Tuesday afternoon.

Home Depot, on the other hand, has rallied sharply on Tuesday, hitting a new 12-year high and closing in on its all-time high of $70, set back in April 2000.

What accounts for the remarkable divergence between the homebuilders and Home Depot?

The answer comes down to comments made by Donald J. Tomnitz, Vice-Chairman, Chief Executive Officer, President and Member of the Executive Committee for D.R. Horton.

Lack of Jobs a Concern

Tomnitz said without steady job creation in the United States, housing will not be able to make a healthy turnaround.

"Again, I get back to the one overriding driving force in our industry, and that is job creation," Tomnitz said in answer to an analyst's question during yesterday's conference call. "And I still don't see a lot of jobs being created. And I also see the fact that there are potential layoffs in a number of industries, especially the defense industry, which could adversely affect our business."

Tomnitz complained that small businesses were not being given enough incentives to create jobs and would be penalized by ending the Bush tax cuts and the full implementation of Obamacare.

"…I think it's going to be difficult as we move forward to generate the number of jobs in this country that we need for us to have a strong housing market on a 2- to 3-, 5-year basis," Tomnitz said.

Up until Tomnitz made these remarks, both homebuilders were trading in a narrow range. Following Tomnitz's comments, the share prices fell dramatically with D.R. Horton down 5.8% to $19.40 at the close of New York trading on Monday and Beazer, which reported losses for the fourth quarter and for all of fiscal 2011, down 17% to $13.77.

There were signs of hope in the reports for the U.S. housing market.

Both companies reported higher average sales prices for their homes, particularly those being built to order, and increased sales volumes. Both homebuilders raised capital during 2012 to finance the purchase of new land for development and were implementing land purchasing programs.

Financing remains an issue, particularly for first-time home buyers. But those who can get a mortgage are finding new home inventories are low and that there is a lot of competition for the homes that are available.

New home inventories have fallen by more than half and now stand at 4.5 months of sales, near a 50-year low, according to a survey cited by National Mortgage Professional Magazine.

"The primary reason for the low months of remaining inventory for new single family homes is the historically low number of new homes for sale," said Tom O'Grady, CEO of Pro Teck Valuation Services. "In recent years, new housing supply has been running at the lowest levels since the 1960's due to the slowdown in new home construction, the size of homes being built, and the complicated process for selling/buying distressed properties."

For investors, the issue is that both BZH and DHI share prices have discounted a lot of good news. Until yesterday's decline, Beazer Homes had been up more than 30% during 2012 while D.R. Horton shares had been more than 65% higher year to date.

Even if the outlook for 2013 is positive-as both companies say it is-that is not enough. Share prices have clearly gotten ahead of the improving fundamentals in the homebuilding sector.

Home Depot (NYSE: HD) Thriving

Home Depot is a different story.

Home Depot benefits from home renovation as well as construction activity. A strong housing market is certainly positive for Home Depot but it is not a necessity. The average consumer can easily fund the average purchase at Home Depot without seeking a bank loan, which makes the home center business more resilient.

The recovery of housing prices may help Home Depot in other ways.

Investors:

Bloomberg Businessweek writes, "More than 1.3 million homeowners who were "underwater' on their mortgages — the owners owe more than their property is worth — have moved above the break-even point on their homes, according to CoreLogic of Santa Ana, California."

That could mean more people fixing up their homes either because they want to stay or because they want to sell.

As for homebuilders, Tomnitz remains positive for fiscal 2013, ending Sept. 30, 2013 saying, "I just think 2013, unless something adversely affects that I don't see on the horizon right now, we're going in with eyes wide open and great expectations."

Home Depot (NYSE: HD) is up 51% for the year.

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Join the conversation. Click here to jump to comments…

  1. David | November 14, 2012

    I was under the impression that housing was already making a slight turnaround…no? Haven't prices started going back up?

  2. Ron J | November 14, 2012

    I agree I'm buying now as we speaqk

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