Rising need for more work-at-home space and record-low borrowing costs have been aiding the Zacks Building Products – Home Builders industry. Indeed, the U.S. housing space continues to grapple with labor shortage and a dearth of buildable lots. Also, disruption in the supply chain arising from the novel coronavirus outbreak may impact builders’ ability to deliver in time. That said, low mortgage rates and the Fed’s dovish stance should continue to spur home buying activity in the near term, thereby aiding companies like D.R. Horton, Inc. (DHI – Free Report) , Lennar Corporation (LEN – Free Report) , TRI Pointe Group, Inc. (TPH – Free Report) , Beazer Homes USA, Inc. (BZH – Free Report) , M/I Homes, Inc. MHO, and Taylor Morrison Home Corporation (TMHC – Free Report) .
The Zacks Building Products – Home Builders industry comprises manufacturers of residential and commercial buildings. Some of the industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agency and closing services.
3 Trends Shaping the Future of the Homebuilding Industry
Fed’s Dovish Stance & Low Borrowing Costs: The U.S. housing market is witnessing an impressive comeback on major data points, with home sales rising at a record pace, defying low inventory levels and broad-based economic and public health risks. The fundamentals of this rate-sensitive market, which accounts for almost 3% of the economy, remain favorable given the Fed’s dovish monetary stance and lower mortgage rates. Additionally, the need to rebuild inventories is expected to drive the U.S. housing aggressively.
Suburban Shift, Cost-Control Efforts, Focus on Entry-Level Buyers: Apart from low borrowing costs, the changing geography of housing demand has been supporting builder confidence. Demand for new homes is improving in lower density markets, including small metro areas, rural markets and large metro exurbs, as people seek larger homes to work from home during the pandemic. The desire for more space and amenities to accommodate working from home and learning from home should continue to boost the U.S. housing market in the near term.
Furthermore, homebuilders have been controlling construction costs by designing homes efficiently and obtaining construction materials and labor at competitive prices. Some homebuilders also follow a dynamic pricing model, which enables it to set price according to the latest market conditions. Again, majority of the companies are focused on growing demand for entry-level homes, addressing the need for lower-priced homes, given the affordability concerns prevailing in the U.S. housing market. Meanwhile, industry biggies have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, revenues and profitability.
Supply Chain Hurdles, Higher Input Costs & Tight Labor Market: However, the COVID-19 outbreak and response to the health crisis in various countries are likely to have a lingering impact on the supply chain in the near term, which may impact builders’ ability to deliver in time. Precisely, rising material costs are quite a challenge. According to an Associated Builders and Contractors’ latest analysis of information provided by the U.S. Bureau of Labor Statistics, there has been some upward pressure on certain input prices in recent weeks, including energy prices. Precisely, softwood lumber prices were 37.2% higher in November 2020 from a year ago.
Again, shortage of skilled labor continues to be a pressing concern. Homebuilders remain cautiously optimistic about the industry’s prospects owing to rising land and labor costs. Meanwhile, the pace of improvement in the labor market has moderated in recent months. Stagnant employment growth and slow pace of economic recovery might have major implications on the industry.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products – Home Builders industry is a 16-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #39, which places it at the top 15% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since July 2020, the industry’s earnings estimates for 2020 and 2021 have gone up approximately 13.8% and 29.5%, respectively.
Given the solid near-term prospects, 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 Outperforms Sector and S&P 500
The Zacks Building Products – Home Builders industry has outperformed the S&P 500 Index and the broader Zacks Construction sector in the past year.
Over this period, the industry has gained 30.7% compared with the S&P 500’s rise of 17.2% and the broader sector’s 20.8% increase.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 9.2X compared with the S&P 500’s 23.1X and the sector’s 17.1X.
Over the last five years, the industry has traded as high as 14.4X and as low as 6.3X, with the median at 10.7X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
5 Homebuilding Stocks to Buy Right Now
We have selected five stocks from the Zacks homebuilding space that currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
D.R. Horton, Inc.: This Texas-based company is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses, both in the entry-level and move-up markets. Its industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots and homes along with affordable product offerings across multiple brands will drive growth. D.R. Horton ended fiscal 2020 on a strong note, with adjusted earnings and revenues increasing 42% and 15%, respectively.
The stock has gained 37.5% this year, outperforming the industry’s 30.4% rise. The company currently sports a Zacks Rank #1 and has an expected earnings growth of 23.6% for fiscal 2021. The Zacks Consensus Estimate for its fiscal 2021 earnings has moved up 1.5% over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DHI
Lennar Corporation: Based in Miami, FL, Lennar is engaged in homebuilding and financial services in the United States. The company’s dynamic pricing model, asset light strategy, effective cost control and higher operating leverage have been aiding its performance. Although rising land and labor costs remain headwinds, its focus on lighter land strategy to boost free cash flow will bolster the balance sheet and thereby drive returns.
The stock has gained 42.5% so far this year. The company currently sports a Zacks Rank #1 and has an expected earnings growth of 18.9% for fiscal 2021. The Zacks Consensus Estimate for its fiscal 2021 earnings has moved up 9.9% over the past 30 days.
Price and Consensus: LEN
TRI Pointe Group, Inc.: Based in Irvine, CA, this company engages in the design, construction, and sale of single-family detached and attached homes in the United States. The company has been gaining from robust demand, pricing and better operating leverage. The cost-cutting initiatives, implemented earlier this year, and focus on entry-level buyers have been adding to the positives. Furthermore, the company witnessed net order growth of 50% year over year in the third quarter 2020. The upside in orders was broad-based across a number of demographic segments and geographies, with 38% of buyers representing the millennial cohort.
The stock has gained 12.2% so far this year. This stock also sports a Zacks Rank #1. The Zacks Consensus Estimate for its 2020 and 2021 earnings has gone up 0.5% and 2.5%, respectively, over the past 30 days. Earnings for the current year and 2021 are expected to witness 27.8% and 33.2% growth, respectively.
Price and Consensus: TPH
Beazer Homes USA, Inc.: Headquartered in Atlanta, GA, this company designs, constructs, and sells single-family and multi-family homes under the Beazer Homes, Gatherings, and Choice Plans names. Solid backlog level is expected to provide a major boost to its performance in the near term. Backlog, as of Sep 30, 2020, increased 49.6% to $995.3 million, or 2,509 homes from the year-ago period.
The stock has gained 13.8% so far this year. The company currently sports a Zacks Rank #1 and has an expected earnings growth of 2.2% and 24.9% for current fiscal year and the next, respectively. The Zacks Consensus Estimate for its fiscal 2021 earnings has moved up 20.6% over the past 30 days.
Price and Consensus: BZH
M/I Homes, Inc.: Headquartered in Columbus, OH, this company operates as a builder of single-family homes in Ohio, Indiana, Illinois, Michigan, Minnesota, North Carolina, Florida, and Texas, the United States. Record backlog level and improved margins have been driving growth. Notably, its third quarter of 2020 saw a 71% increase in new contracts, a 29% rise in homes delivered, 240-basis point expansion in gross margin and 94% growth in net income.
The stock has gained 20.3% so far this year. The company currently carries a Zacks Rank #2. It has an expected earnings growth of 82.3% for the current year. The Zacks Consensus Estimate for its 2021 earnings has moved up 8.5% over the past 30 days.
Price and Consensus: MHO
Taylor Morrison Home Corporation: Headquartered in Scottsdale, AZ, this company designs, builds, and sells single-family and multi-family attached and detached homes; and develops lifestyle and master-planned communities. Strategic transformation has provided the company with enhanced operating efficiencies and greater depth in each of the markets served and consumer segments. Integration of William Lyon Homes WLH, one of the largest homebuilders in the Western United States, is expected to provide a major boost to its top line. The buyout will not just expand the company’s footprint in Pacific Northwest and Nevada but also increase its market share in Colorado, Arizona, Texas and California.
The stock has gained 23.8% so far this year. The company currently carries a Zacks Rank #2. It has an expected earnings growth of 102.8% for 2021. The Zacks Consensus Estimate for its 2021 earnings has moved up 3.3% over the past 30 days.
Price and Consensus: TMHC