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Homebuilding Outlook: Low Rates, Solid Job Market Raise Hope

Shrabana Mukherjee

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.

Let’s take a look at the industry’s three major themes:

  • Stable economy, rising disposable income and favorable demographic changes are continuing to support demand. The U.S. economy is clearly on a solid footing given impressive labor market, low unemployment rate, rising wages and modest inflation. This is expected to boost housing activity and provide the basis for stronger demand in the near term. Meanwhile, the U.S. Federal Reserve’s dovish monetary stance is certainly a boon for the rate-sensitive housing market.

  • Raw material prices — which have been increasing in double digits over the past few months due to the initial effects of tariffs on items like steel, aluminum and softwood lumber — are now decreasing. This should provide a meaningful boost to margins in the near term. According to an Associated Builders and Contractors' ("ABC") analysis of information provided by the U.S. Bureau of Labor Statistics, June construction material prices dropped 1.3% on both a monthly and yearly basis. Notably, this is the first time in nearly three years that input prices have fallen year over year.

  • However, despite the fact that declining mortgage rates and lower housing prices have been driving traffic after a tough second half of 2018, the conversion of that traffic to sign purchase contracts slowed. Softness in homebuying demand, in response to affordability challenges and general market uncertainty, is impacting the companies’ order flow. Again, shortage of skilled labor is a cause of concern. Homebuilders continue to be cautiously optimistic about the industry’s prospects due to rising land, labor and construction costs. Again, increasing incentives to drive sales are compressing margins.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Home Builders industry is an 18-stock group within the broader Zacks Construction Sector. The industry currently carries a Zacks Industry Rank #58, which places it at the top 23% 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 June 2019, the industry’s earnings estimates for 2019 have gone up approximately 1%.

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 But Lags S&P 500

The Zacks Building Products - Home Builders industry has lagged the S&P 500 Index but outperformed the broader Zacks Construction Sector in the past year.

Over this period, the industry has gained 1.5% versus the broader sector’s decline of 7% and the S&P 500 Index gain of 4.1%.

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 9.7X compared with the S&P 500’s 17.2X and the sector’s 13.7X.

Over the last five years, the industry has traded as high as 15.1X and as low as 7.3X, with the median at 11.6X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500




Bottom Line

Indeed, the U.S. housing space continues to grapple with labor shortage, a dearth of buildable lots and rising construction costs. That said, the recent softening in home price appreciation, low mortgage rates and Fed’s dovish stance should spur home buying activity in the near term.

Currently, there are five top-ranked stocks in the Zacks Building Products - Home Builders industry that are cashing in on the positive industry fundamentals.

M.D.C. Holdings, Inc. (MDC): This Denver, CO-based homebuilder carries a Zacks Rank #1 (Strong Buy) and the Zacks Consensus Estimate for its 2019 earnings has gone up 7.9% over the past 30 days.

Price and Consensus: MDC




Beazer Homes USA, Inc. (BZH): This Atlanta, GA-based homebuilder carries a Zacks Rank #2 (Buy). The company has a strong earnings surprise history, beating the Zacks Consensus Estimate in three of the trailing four quarters, with the average being 74.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: BZH



Hovnanian Enterprises, Inc. (HOV): Headquartered in Matawan, NJ, this homebuilder currently carries a Zacks Rank #2. The estimate for the current year has been revised from a loss of 75 cents to earnings of 5 cents per share over the past 30 days.

Price and Consensus: HOV



KB Home (KBH): Los Angeles, CA-based homebuilder carries a Zacks Rank #2. It has an average positive earnings surprise of 15.1% for the trailing four quarters. The Zacks Consensus Estimate for the company’s 2019 earnings has gone up 1.9% over the past 30 days.

Price and Consensus: KBH



NVR, Inc. (NVR): Headquartered in Reston, VA, this homebuilder currently carries a Zacks Rank #2. It has an average positive earnings surprise of 20.4% for the trailing four quarters. The Zacks Consensus Estimate for its 2019 earnings has gone up 1.1% over the past 30 days.

Price and Consensus: NVR




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NVR, Inc. (NVR) : Free Stock Analysis Report
 
M.D.C. Holdings, Inc. (MDC) : Free Stock Analysis Report
 
KB Home (KBH) : Free Stock Analysis Report
 
Hovnanian Enterprises Inc (HOV) : Free Stock Analysis Report
 
Beazer Homes USA, Inc. (BZH) : Free Stock Analysis Report
 
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