5 Best Home Construction Inventories To Benefit From The Booming Industry – September 3, 2021
The growing need for more home workspace and record borrowing costs have helped the Zacks Building Products – Home Builders industry. Indeed, the US real estate sector continues to face rising costs of raw materials and labor. In addition, supply chain disruptions resulting from the novel coronavirus outbreak may impact the ability of manufacturers to deliver on time. That said, low mortgage rates and the Fed’s dovish stance should continue to boost short-term home buying activity, helping businesses like Toll Brothers Inc. (TOL – Free report), Meritage Houses Company (MTH – Free report), TRI Pointe Group, Inc. (TPH – Free report), Communities of the Century, Inc. (CCS – Free report), and M / I Homes, Inc. (MHO – Free report).
The Zacks Construction Products – Home Builders segment includes manufacturers of residential and commercial buildings. Some of the players in the industry are involved in providing financial services which include selling mortgages and collecting fees for title insurance agencies as well as closing services. Industry players are involved in building communities of detached and attached single-family homes; townhouses, condominiums, duplexes and triplexes; planned luxury residential resort style golf communities; and low, medium and high rise urban communities. Businesses are also involved in the purchase, development and sale of residential land. In addition, companies build and own multi-family rental properties; residential real estate; and oil and gas assets.
3 trends shaping the future of the home construction industry
The Fed’s dovish stance and low borrowing costs: The US real estate market remains dynamic, with home sales increasing at a record pace, defying low inventory levels and widespread economic and public health risks. The fundamentals of this rate-sensitive market – which represents nearly 3% of the economy – remain favorable, given the accommodative monetary position of the Fed and lower mortgage rates. Additionally, the need to rebuild inventory is expected to aggressively boost housing in the United States.
Suburban shift, cost control efforts and focus on entry-level buyers: In addition to low borrowing costs, the changing geography of housing demand has supported builder confidence. Demand for new housing is improving in low-density markets, including small metropolitan areas, rural markets and large metropolitan suburbs, as people seek larger housing to work from home amid the pandemic. The desire for more space and amenities to allow working and learning from home is expected to continue to drive the US housing market in the near term.
Home builders control construction costs by efficiently designing homes and obtaining competitively priced building materials and labor. Some home builders follow a dynamic pricing model, which allows them to price according to the latest market conditions. Again, the majority of businesses are focused on the growing demand for entry-level housing and the need for low-cost housing, given the affordability issues prevalent in the US housing market. Meanwhile, industry greats like Lennar (LEN – Free report), Pulte Group (MPS – Free report), DR Horton (DHI – Free Report) and others have acquired other residential construction companies in desirable markets resulting in improved volumes, revenues as well as profitability.
Supply chain barriers, higher input costs and tight labor market: The COVID-19 outbreak and the response to the health crisis in various countries are likely to have a persistent impact on the supply chain in the short term, which, in turn, may impact capacity builders to deliver on time. Precisely, rising material costs is quite difficult. According to a latest analysis of information provided by Associated Builders and Contractors by the United States Bureau of Labor Statistics, there has been upward pressure on the prices of some inputs, including energy prices, over the course of the last few weeks. Again, the shortage of skilled labor continues to be a pressing concern. Homebuilders remain cautiously optimistic about the outlook for the industry amid rising input and labor costs.
Zacks’ Industry Rankings Shows Bright Prospects
Zacks Building Products Industry – Home Builders is a 19-stock group within the larger Zacks Construction industry. The industry currently holds a Zacks Industry Rank # 37, which places it in the top 15% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates an optimistic outlook for the near term. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of industries ranked by Zacks is the result of positive earnings prospects for all of the constituent companies. Looking at the revisions to the overall earnings estimates, it appears that analysts are gradually gaining confidence in the earnings growth potential of this group. Since May 2021, industry profit estimates for 2021 and 2022 have increased by around 10.5% and 11.4%, respectively.
Given the strong near-term outlook, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry is lagging behind and the S&P 500
The Zacks Building Products – Home Builders industry has lagged behind the S&P 500 Index and the broader Zacks Construction sector over the past year.
During that time, the industry gained 28.5% from the S&P 500’s 33.7% rise and the broader sector’s 38.8% rally.
One-year price performance
Current industry assessment
Based on the 12-month futures price / earnings ratio, which is commonly used to value residential construction stocks, the industry is currently trading at 7.8 vs. 21.8 for the S&P 500 and 15.2 for the area.
Over the past five years, the industry has traded up to 14.4X and up to 6.3X, with a median of 10X, as shown in the chart below.
Industry P / E Ratio (12-month futures) vs. S&P 500
5 home construction stocks to buy now
We’ve selected five stocks from the Zacks homebuilding space that currently sport either a Zacks Rank 1 (Strong Buy) or 2 (Buy).
M / I houses: This Columbus, OH-based single-family home builder has enjoyed a high level of performance across its 15 housing operations and the mortgage and title business. Increased deliveries, greater operating leverage, an exceptional order backlog and better return on equity have helped the company generate better profits.
The stock, currently ranked No.1 by Zacks, has gained 53.3% so far this year, outperforming the industry rally by 25.8%. Zacks’ consensus estimate for its 2021 results has been revised up 32.5% in the past 30 days. Profits for 2021 are expected to grow 63.3%.
Price and consensus: MHO
TRI Pointe Group: Based in Irvine, Calif., This company is engaged in the design, construction and sale of single-family and attached single-family homes in the United States. It benefited from robust demand, pricing and better operating leverage. The cost-cutting initiatives implemented earlier this year and the focus on entry-level buyers added to the positives. The company saw order backlog (in units) growth of 53% year-over-year for the second quarter of 2021. The increase in orders was widespread across a number of demographics and geographies, with the majority of buyers representing the millennium cohort.
The stock, currently ranked Zacks Rank # 1, has gained 39.6% year-to-date. Zacks’ consensus estimate for its 2021 results has been revised up 15.3% in the past 30 days. Profits for 2021 are expected to grow 66.8%.
Price and consensus: TPH
Meritage Houses: Based in Scottsdale, AZ, Meritage Homes is a leading designer and builder of single family homes. The company’s successful execution of strategic initiatives to increase profitability and focus on entry-level LiVE.NOW homes bodes well. In addition, Meritage Homes’ strategy of targeting entry-level buyers is gaining momentum and will continue to increase its performance over the long term.
The profits of this company Zacks Rank # 1 are expected to increase by 72.4% in 2021. They have gained 34.5% during the period since the start of the year. Meritage Homes has seen an upward revision of the estimate of 2.3% for 2021 profits over the past 30 days.
Price and consensus: MTH
Toll brothers: Based in Horsham, Pa., Toll Brothers is a leading luxury home builder. The company benefited from its strategy of expanding product lines, prices and geographic areas. It also benefits from a favorable real estate environment, a lack of competition in the luxury new home market and buyout synergies.
The profits of this company Zacks Rank # 1 are expected to increase by 75% in 2021. They have increased by 47.4% since the start of the year. Toll Brothers has seen an upward revision of the estimate of 3.1% for fiscal year 2021 profits over the past seven days.
Price and consensus: TOL
Communities of the century.: This Greenwood Village, CO based company is engaged in the design, development, construction, marketing and sale of single family attached and detached homes. Demand for its affordable new homes, driven by favorable demographics, a tight resale supply and low interest rates, while underscoring the strength of its competitive positioning and national presence in 30 high-growth markets, stimulated the growth of Century Communities.
The title has gained 64.2% since the start of the year. The company currently holds a Zacks # 2 rank and has an expected earnings growth of 119.5% for 2021. The Zacks consensus estimate for its 2021 earnings has increased by 18% in the past 60 days.
Price and consensus: CCS