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4 Stocks to Play the Strength in the Homebuilding Industry

Indeed, the U.S. housing space continues to grapple with rising raw material and labor costs. Also, disruption in the supply chain arising from the novel coronavirus outbreak may impact builders’ ability to deliver on time. That said, the rising need for more work-at-home space has been aiding the Zacks Building Products - Home Builders industry. Also, companies like NVR, Inc. NVR, TRI Pointe Group, Inc. TPH, M/I Homes, Inc. MHO, and Beazer Homes USA, Inc. BZH have been gaining from higher demand, focus on cost control, increased operating leverage, and important buyouts.

Industry Description

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 agencies as well as closing services. The industry players are involved in building single-family detached and attached home communities; townhouses, condominiums, duplexes and triplexes; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities. The companies are also involved in the purchase, development and sale of residential land. Additionally, the companies build and own multi-family rental properties; residential real estate; and oil and gas assets.

3 Trends Shaping the Homebuilding Industry's Future

Suburban Shift: 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 amid the pandemic. The desire for more space and amenities to accommodate working and learning from home should continue to boost the U.S. housing market in the near term.

Cost-Control Efforts, Focus on Entry-Level Buyers & Acquisitions: Given the accelerated raw material prices, the companies have been relying on effective cost control and focusing on making the homebuilding platform more efficient, which in turn is resulting in higher operating leverage. 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 them to set the price according to the latest market conditions.

Also, the majority of companies are focused on growing the demand for entry-level homes and addressing the need for lower-priced homes, given affordability concerns prevailing in the U.S. housing market. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, market share, revenues as well as profitability.

Supply Chain Hurdles, Tight Labor Market & Higher Rates: Continuous supply-chain issues arising from the COVID-19 outbreak and response to the health crisis in various countries have been impacting builders’ ability to deliver on time. Also, rising material costs are quite challenging. According to an Associated Builders and Contractors' latest analysis of information provided by the U.S. Bureau of Labor Statistics, there has been upward pressure on construction input prices in recent weeks. Again, the shortage of skilled labor continues to be a pressing concern. Homebuilders remain cautiously optimistic about the industry’s prospects owing to the rising input and labor costs.

While supply-chain challenges are expected to continue to impact the level of housing starts and construction cycle times, home affordability issue remains a headinwd owing to accelerating home prices and mortgage rates this year. It is to be noted that the Federal Reserve expects to raise interest rates three times in 2022 as it exits from the policies enacted at the start of the health crisis. Interest rate hikes, soaring inflation and a smaller bond-buying program are pointing to higher mortgage rates in 2022. This may prove less encouraging for this rate-sensitive market, which accounts for almost 3% of the economy.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Home Builders industry is a 19-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #68, which places it at the top 27% 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 outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning 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 March 2022, the industry’s earnings estimates for 2022 have increased approximately 4.9%.

Given 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 Lags Sector and S&P 500

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

Over this period, the industry has lost 21.3% compared with the S&P 500’s decline of 3% and the broader sector’s 16.1% decline.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 4.4 compared with the S&P 500’s 17.3 and the sector’s 10.7.

Over the last five years, the industry has traded as high as 14.37X and as low as 4.37X, with a median of 9.51X, as the chart below shows.

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

4 Homebuilding Stocks to Buy Right Now

We have selected four stocks from the Zacks homebuilding space that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Beazer Homes: This Atlanta, GA-based homebuilder designs, builds and sells single-family homes. BZH designs homes to appeal primarily to entry-level and first move-up homebuyers. BZH’s subsidiary, Beazer Mortgage, originates the mortgages for the company's homebuyers. The company’s Balanced Growth strategy, higher pricing, lower sales incentives and a solid backlog level are expected to improve profitability.

BZH currently flaunts a Zacks Rank #1 and has an expected earnings growth rate of 48.9% for fiscal 2022. Although its shares have declined 28.5% over the past year, BZH has seen an upward estimate revision of 14.6% for fiscal 2022 earnings over the past 30 days. This depicts analysts’ optimism over the company’s prospects.

Price and Consensus: BZH

TRI Pointe Group: Based in Irvine, CA, this company engages in the design, construction, and sale of single-family detached and attached homes in the United States. It has been gaining from robust demand, pricing and better operating leverage. Cost-cutting initiatives implemented earlier this year and focus on entry-level buyers have been adding to the positives. Tri Pointe remains focused on improving its operational and financial performance by executing the strategic initiatives that include the continued monetization of long-dated California assets, the growth and build-out of early-stage markets, a disciplined approach to land acquisition, further improvements to cost structure across the homebuilding platform and a consistent stock repurchase program.

TPH stock, carrying a Zacks Rank #1 at present, has dropped 9.6% year over year. The Zacks Consensus Estimate for its 2022 earnings has been upwardly revised by 6.8% over the past 30 days. Earnings for 2022 are expected to grow 29.6%.

Price and Consensus: TPH

M/I Homes: This Columbus, OH-based builder of single-family homes has been gaining from a high level of performance across all of its housing operations, and the Mortgage and Title business. Increased deliveries, greater operating leverage, a stellar backlog level and a higher return of equity have been helping the company to generate improved profits. MHO remains optimistic for 2022 given its record backlog and strong backlog margins, along with a record number of new community openings planned this year.

MHO, carrying a Zacks Rank #2 at present, has slipped 29.9% over the past year. Nonetheless, the Zacks Consensus Estimate for its 2022 earnings has been upwardly revised by 5.6% over the past 30 days. This depicts analysts’ optimism over the company’s propects. Earnings for 2022 are expected to grow 21.3%.

Price and Consensus: MHO

NVR: This Reston, VA-based homebuilder is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. In order to serve homebuilding customers, NVR operates a mortgage banking and title services business. A disciplined business model and focus on maximizing liquidity and minimizing risks have been aiding NVR.

NVR currently holds a Zacks Rank #2 and has an expected earnings growth rate of 68.4% for 2022. Its shares have lost 7.2% over the past year. That said, NVR has seen an upward estimate revision of 20.4% for 2022 earnings over the past 30 days.

Price and Consensus: NVR

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NVR, Inc. (NVR) : Free Stock Analysis Report

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

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

MI Homes, Inc. (MHO) : Free Stock Analysis Report

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