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Earnings bonanza for homebuilders

January 15, 2013: 10:23 AM ET

Homebuilders are back.

housing_constructionFORTUNE -- On Tuesday, Lennar Homes, the third-largest U.S. builder by revenue, beat Wall Street expectations when it reported that profits more than quadrupled to $124.3 million during the last three months of 2012, compared with $30.3 million a year earlier. The Miami-based company delivered 4,443 homes, up 32%, while the average selling price rose 7% to $261,000.

While impressive, Lennar (LEN) isn't the only builder Wall Street is excited about. As profits across much of corporate America are forecast to slow in the fourth quarter, the narrow (but widely watched) industry that builds America's homes is expected to see its bottom line soar in big ways. The 2005 housing bust brought about a huge decline in home prices, but that reversed last year. And shareholders invested in builders are poised to gain from the recovery -- if they haven't already.

Earnings from builders listed on the S&P500 (DR Horton, PulteGroup and Lennar) have been inconsistent during much of 2012, but taken as a whole, these companies are expected to outperform the index during the fourth quarter, says John Butters, equities analyst at FactSet. Earnings are expected to grow by 238.4%, while companies across the S&P are expecting a measly 1.7% growth during the same period.

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To be sure, the rebound comes after years of big losses. In 2012, the housing market did better than most expected, which helped give builders confidence to build more. Home prices edged up. And home sales rose 6% to 4.2 million, up from 4 million in 2011, according to CoreLogic. That's the first increase since 2005, although levels are still below the typical rate of about 5.5 million that the U.S. saw in the early 2000s.

Nonetheless, investors of builders big and small saw the difference. Those that generated the biggest returns include: PulteGroup Inc. (PHA) at 187.8%, followed by M/I Homes (MHO) with 176%, KB Home (KBH) with 138.2% and MDC Holdings Inc. (MDC) with 121.4%, according to S&P Capital IQ.

In the year ahead, they'll likely be the darlings on Wall Street. Last week, Goldman Sachs name all but M/I its favorite homebuilder stocks, with buy ratings across the board.

This says a lot about the recovery. MDC Holdings has seen about 40% of sales from Denver, CO and Phoenix, AZ, where the rebound in prices and sales have been among the strongest in the country.

KB Home, the Los Angeles builder that targets first-time buyers, disappointed investors with weaker than expected growth on orders of new homes during the three months ended Nov. 30. However, Goldman has kept a buy rating on the stock, partly because its main markets are in Texas, California, Colorado and Nevada -- states where the housing market on average is growing faster than the rest of the country.

The bank also favorites Toll Brothers (TOL), the nation's largest luxury-home builder. Bank of America Merrill Lynch also has a buy rating on the company, noting that its focus on richer consumers have helped the builder outsell competitors.

The stock market has been rapidly rising. It's clear this has less to do with higher profits than worries over low bond yields, Europe's debt troubles and other headwinds in the economy. Builders have joined the ride, but unlike much of the rest of corporate America, higher earnings are what's likely to drive their stocks up in 2013.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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