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There’s no denying that the U.S. housing data has been weak in the recent months, as inventory shortage has started taking toll on sales’ pace and pushed the average home prices higher nationwide. Additionally, the U.S. Government’s latest move of imposing tariff on imported steel and aluminum has propelled concerns among investors regarding certain U.S. sectors, particularly construction.
Nonetheless, overlooking the sector will not be advisable, as there are a number of companies with a decent performance history and strong fundamentals, signaling toward a profitable investment opportunity. After all, the overall outlook for the U.S housing industry remains positive, with a healthy economy, strong job market and builders’ confidence continuing to drive stocks higher.
Atlanta-based homebuilder, Beazer Homes USA, Inc. BZH is one such company that continues to show strength in several areas. Adding the stock to your portfolio should not be a disappointment. Shares of Beazer Homes, one of the country’s largest single-family homebuilders, have gained 23.7% over the past year, outperforming the 10% growth of its industry.
Earnings estimates for Beazer Homes have exhibited an uptrend, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s current-quarter earnings has also moved up 7.9% over the past 60 days. Let us delve deeper into the other factors that make this Zacks Rank #2 (Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What Makes the Stock an Attractive Pick?
Solid Growth Prospects: Presently, the problem of adequate supply of land is taking its worst shape, as demand continues to scale up in the homebuilding industry. Given significant pent-up housing demand, Beazer Homes has secured a decent backlog. In the last reported quarter, the company generated a backlog conversion ratio of nearly 67%, up from 64% recorded last year.
At the end of the fiscal second quarter, Beazer Homes had a backlog of 2,312 homes, up 3.4% year over year. Potential housing revenues from backlog grew 14% year over year to $885.4 million (as of Mar 31, 2018).
Meanwhile, the rising land and labor costs are threatening margins of major homebuilders. In this respect, the company has managed to control costs, as is evident from its gross margin expansion. The company’s homebuilding gross margin expanded 70 basis points in the first six months of fiscal 2018.
The company’s adjusted EBITDA more than doubled to $189 million in the fiscal second quarter and also grew 17.9% in the first half of the year. The company remains on track to achieve its underlying 2B-10 goal of $200 million EBITDA by the end of fiscal 2018.
Beazer Homes has solid growth prospects, as is evident from the Zacks Consensus Estimate for earnings of 41 cents per share for the current quarter, which is expected to grow 78.3% year over year. Meanwhile, the company’s sales are expected to increase 7.8% in the current quarter. Overall, Beazer Homes constitutes a great pick in terms of its growth investment, supported by a Growth Score of A.
Valuation Looks Rational: Because of homebuilders’ asset-driven nature, it makes sense to value them based on price-to-book (P/B) ratio. The company currently has a trailing 12-month P/B ratio of 0.89. This is quite low compared with the current P/B for the industry and S&P 500 that are pegged at 1.4 and 3.88, respectively. Its lower-than-market positioning indicates that there is room for an upside in the quarters ahead, substantiating its Value Score of A.
Solid Industry Fundamentals: The company’s business is exposed to the new single-family housing construction market. Despite the month-to-month hiccups, new home sales were up 11.6% year over year in April. Additionally, although April starts and permits tumbled from the March level, housing starts were up 7.2% year over year in single-family homes. Permits were 7.7% above the April 2017 rate of 1.26 million units, prompted by a 7.9% surge in single-family homes and 6.4% growth in buildings by five units or more.
On the other hand, builder confidence increased two points to 70 in May from a downward revision of 68 in April, reinstating builders’ confidence in the current housing market. Importantly, the reading was above the 50 mark in the first five months of 2018, indicating a favorable outlook. Moreover, this is the fourth time in 2018 that the index has reached 70. Builders are particularly optimistic about growing consumer demand for single-family homes.
Homebuilders are currently well placed, belonging to a top-ranked Zacks Industry (top 23%), suggesting that the market headwinds were unable to take the sheen away from the sector.
Solid VGM Score: The company has an impressive VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 make solid investment choices.
Other Stocks to Consider
Other top-ranked stocks in the same space are Century Communities, Inc. CCS, M.D.C. Holdings, Inc. MDC and Lennar Corporation LEN.
Century Communities sports a Zacks Rank #1 and its earnings for the current year are likely to increase 47%.
M.D.C. Holdings is also a Zacks Rank #1 stock and its earnings for the year are expected to grow 30.6%.
Lennar carries a Zacks Rank #2 and its fiscal 2018 earnings are expected to grow 18.4%.
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