It might not be home building season, but builders are a fair game right now


Homebuilders are looking to close out a very strong year (or two), as the pandemic-inflated 2020 boom has resulted in record inventories and sky-high prices, even as constraints on land, labor and raw materials made it much more difficult to build up stocks.

This is clear from the Housing and Urban Development program (HUD) statistics for October. And so we see that while the housing units allowed by building permits were 3.4% (± 1.6%) above October 2020, housing starts were only 0.4%. (± 12.3%) above last year’s level and completions were 8.4% (± 9.2%) below. Thus, although permits are requested and received, production appears to be insufficient. And limited supplies of course drive up prices.

Prices became so high between the two that some buyers left the market, preparing to wait for sanity to return. The jury is still out on how long this wait will last, but different data points indicate that it is going to be relatively long.

Earlier this month, we learned that the NAHB / Wells Fargo Housing Market Index (for the single-family housing market) for November reaches its highest level in six months, indicating that buyers are prepared to pay higher prices and even wait for the additional delay. The single-detached home sub-index also rose 3 points as the gauge of potential buyers rose from 65 to 68.

Meanwhile, the Mortgage Bankers Association (MBA) noted yesterday that the 30-year fixed rate had risen 4 basis points to 3.24% over the past week, with buying activity continuing to increase for the third week in a row. Part of the reason for this is attempts by borrowers to lock in mortgages in anticipation of rising rates. In addition, requests for conventional and government loans have increased, with loan amounts “mostly over $ 400,000,” according to Joel Kan, assistant vice president of economic and industrial forecasting at the MBA.

Leading the supporting factors is the strong labor market (the unemployment rate fell to 4.6% in October, the lowest level since March 2020), which benefited from the rapid economic rebound from pandemic lows. This has resulted in increased demand for labor, record levels of job vacancies and the resulting wage inflation. With the government also withdrawing its support, the summer wave of COVID-19 infections behind us and high spending this holiday season, unemployment rates are set to drop further, as purchasing power remains strong.

However, we must not forget the logistical challenges and imbalances between the factors of production which lead to a drop in production. GDP growth slowed to 2.1% in the third quarter, entirely due to these challenges. Further price increases are undesirable, but the Fed seems reluctant to do anything just yet.

So here we have an industry that has a huge pent-up demand that will generate growth for the months to come and the kind of pricing that allows it to pass the rising costs on to buyers. It would have been better if the entry challenges hadn’t been there. But in this environment, what is not to like here?

Beazer Homes, Meritage Homes, Tri Pointe Homes, and Toll Brothers are four home building stocks worth buying right now.

Beazer Homes USA BZH

Beazer Homes holds a Zacks # 1 (strong buy) ranking and an A for value, growth and momentum.

It is expected to increase its revenue by 13.6% this year and 9.2% next year. Its profits are expected to increase 23.7% and 6.4%, respectively, over the two years.

Over the past 30 days, Beazer Homes’ estimates for 2021 and 2022 have jumped $ 1.53 (44.0%) and $ 1.34 (33.6%), respectively.

Despite all of these positives, Beazer Homes is trading at a significant discount to both the 22.0x of the S&P 500 and to all of the companies in our universe with a mere 4.1x profit. His own median level over the past year is 7.0X.

Meritage MTH Homes

Meritage Homes also holds a Zacks Rank # 1, but its B, F and D value, growth and momentum scores are not as attractive as Beazer’s.

Still, analysts expect Meritage Homes to generate very strong growth. For 2021, the company is expected to increase revenue and profits by 14.7% and 74.6% respectively. For 2022, these figures should be 20.0% and 21.2% respectively.

The history of revisions to Maisons Méritage’s estimates is also interesting. Its estimates for 2021 are up 56 cents (3.0%) on average, and those for 2022 are up $ 1.89 (8.8%) in the past 30 days. They have steadily increased over the past 90 days.

To top it off, shares in Meritage Homes are almost as inexpensive as Beazer. They are trading at just 5.1X, below their own median level of 6.5X over the past year and the S&P 500.

Tri Pointe Houses TPH

Tri Pointe ranked # 2 (Buy) has value, growth and momentum scores of A, C and F.

Despite the low scores, analysts’ expectations for the company are strong. For 2021, Tri Pointe is expected to generate revenue and profit growth of 21.2% and 80.2%, respectively. This will be followed by revenue growth of 7.7% and profit growth of 9.6% in 2022.

The revisions to Tri Pointe’s estimates are also positive. The 2021 estimate is up 29 cents (8.0%) and the 2022 estimate is up 34 cents (8.6%) in the past 60 days.

At 6.1 times 12-month earnings, Tri Pointe shares are obviously a steal.

Toll Brothers TOL

Toll Brothers shares the second rank of Tri Pointe, but its value, growth and momentum scores of A, B and D are more attractive.

Analysts are currently forecasting double-digit revenue and profit growth for Toll Brothers for 2021 and 2022 (end of October). The growth rates for 2021 are 22.4% for revenue and 80.6% for profits. Growth rates in 2022 are 19.1% for revenues and 43.9% for profits.

Estimates for 2021 and 2022 have both increased by a few cents in the past 30 days. But over the past 90 days, Toll Brothers’ estimates for 2021 and 2022 are up 6.4% and 6.6% respectively.

But without an attractive valuation, shares in Toll Brothers would still not be worth buying. Since they are trading at only 7.3 times earnings (median 9.3 times), there is no reason to complain.

6-month price movement

Image source: Zacks Investment Research

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Toll Brothers Inc. (TOL): Free Stock Analysis Report

Meritage Homes Corporation (MTH): Free Inventory Analysis Report

Beazer Homes USA, Inc. (BZH): Free Inventory Analysis Report

Tri Pointe Homes Inc. (TPH): Free Inventory Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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