How does the demand for residential construction compare to the available supply?
Homebuilder Shares Recent News
Over the past few months, we’ve seen a lot of variability in the residential construction industry. In the most recent US Department of Commerce report, sales of existing homes in August fell 2% as supply remained tight, with key figures moving in opposite directions from a year ago: 13.4% drop in housing stock and a 14.9% increase in median home price. Frenzied demand for housing has been fueled by the coronavirus pandemic, but there are signs that this demand and the corresponding surge in house prices appear to be slowing. While the housing market was booming at the start of the pandemic, primarily for single-family homes, total home sales increased as resales declined. Existing home sales account for the bulk of home sales in the United States. Rising prices for existing homes are expected to slow as the housing inventory shortage eases and demand moderates.
Despite negative news regarding the supply of materials and labor shortages and falling sales of existing homes, new home sales rose 1.5% month-over-month in August to reach a seasonally adjusted annual rate of 740,000 units. The current stock of new homes on the market represents the largest supply for nearly 13 years. However, about 78% of those homes are either under construction or under construction, and sales in August were down 24.3% year-over-year. New home sales have struggled to post significant gains since they hit 993,000 units in January, the highest since late 2006. However, the new home market remains attractive and sustained by an acute shortage of older homes to sell.
The increased demand for housing in suburbs and other sparsely populated areas far exceeded supply, leading to bidding wars. Industry fundamentals remain strong, including funding for the US government, improving wages in the labor market and keeping interest rates low.
Ranking of the actions of home builders
When analyzing a business, it helps to have an objective framework that allows businesses to be compared in the same way. This is one of the reasons why the AAII created the A + Classes of investor shares, which rate companies based on five factors that help identify the best performing stocks in the market over the long term: value, growth, momentum, earnings estimate revisions (and surprises), and quality.
Using AAII’s A + ratings, the following table summarizes the attractiveness of three homebuilder stocks — DR Horton, LGI Homes, and Toll Brothers — based on their fundamentals.
AAII A + Action Score Summary for Three Homebuilder Actions
What the A + Share Ratings Say
DR Horton (DHI) is a leading homebuilder in the United States with operations in 90 markets in 29 states. DR Horton primarily builds single-family homes (over 90% of home sales revenue) and offers products to entry-level buyers, luxury buyers and working adults. The residential construction divisions are primarily engaged in the acquisition and development of land as well as the construction and sale of residential homes. The company’s 55 homebuilding divisions are grouped into six segments: East Region, South Central Region, Midwest Region, West Region, Southwest Region and Southeast Region. The Forestar segment is a residential land development company with operations in 55 markets across 22 states. The Company provides mortgage financing and title agency services to homebuyers through its financial services segment.
Recently, DR Horton updated its forecast for closed homes, consolidated revenue and gross margin on home sales for the fourth quarter of fiscal 2021. The company expects homes to close in the fourth quarter. are in a range of 21,300 to 21,700 houses compared to the previous range. from 23,000 to 24,500 housing units. This decrease is due to significant and persistent disruptions in the supply chain, including shortages and delays in delivery of some building materials, as well as tensions in the labor market. Due to lower than expected closing volume, partially offset by an expected increase in the average closed home selling price during the quarter, the company now expects its fourth quarter consolidated revenue to be between 7 , $ 7 and $ 7.9 billion from the previous range of $ 7.9 billion to $ 8.4 billion. As strong demand for new homes and limited supply of homes continue to support pricing power across most of its operating footprint, the company now expects its gross margin on home sales in the fourth quarter is between 26.5% and 26.8%. This is an improvement from the previous range of 26.0% to 26.3%.
Revisions to earnings estimates give an indication of what analysts think about a company’s near-term prospects. The company has a revised earnings estimate rating of C, which is considered neutral. The rating is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current year over the past month and the past three months.
The company reported unexpected positive earnings over the previous two quarters. Over the past month, the consensus estimate of earnings for the third quarter fell from $ 3.51 to $ 3.42 per share based on 10 downgrades. Three months ago, the consensus estimate for earnings was $ 3.06 per share.
A higher quality stock has characteristics associated with upside potential and reduced downside risk. The quality rating backtesting shows that stocks with higher quality ratings, on average, outperformed stocks with lower ratings during the period from 1998 to 2019.
DR Horton has a quality score of A. The A + quality score is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross margin on assets, return on redemption, change in total liabilities over assets, accrued liabilities on assets, bankruptcy risk score (Z) double prime and F-Score . The score is variable, which means that it can take into account all eight measures or, if any of the eight measures are not valid, the remaining valid measures. To be assigned a quality score, however, stocks must have a valid (non-zero) metric and a corresponding rating for at least four of the eight quality metrics.
The company ranks very well in terms of return on assets and redemption return, ranking in the 94th and 88th percentiles of all stocks listed in the United States, respectively. However, it ranks poorly in terms of asset regularization, placing it in the fifth percentile.
DR Horton has a Momentum Grade of D, based on his Momentum Score of 30, and a strong Growth Grade of BDR Horton has a dividend yield of 1.0%.
LGI Homes (LGIH) is engaged in the design, construction and sale of new homes in the markets. The company’s current product offerings include entry-level homes, including single-family homes and townhouses; mobile homes, which are sold under the LGI Homes brand; and luxury serial homes, which are sold under the Terrata Homes brand. It offers a set number of floor plans in each community with features that include upgrades, such as granite countertops, appliances, and ceramic tile floors.
The company is engaged in the design, construction and sale of new homes in the markets of Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia, Virginia and Pennsylvania.
LGI Homes has an A + growth rating of B. The growth rating takes into account both short and long term historical growth in revenue, earnings per share and operating cash flow. The company reported second-quarter revenue of $ 792 million, up 64.3% from $ 482 million in the previous year’s quarter. The company reported quarterly diluted earnings per share of $ 4.71. LGI Homes does not currently pay any dividends.
LGI Homes has a Momentum Grade of D, based on its Momentum Score of 29.
Toll brothers (TOL) is the leading luxury home builder in the United States with an average selling price well above the prices of public competitors. She is engaged in the design, construction, marketing, sale and organization of financing for detached and attached homes in luxury residential communities. The company operates through two segments: traditional residential construction and urban infill. The Traditional Home Building segment builds and sells homes for single and attached homes in luxury residential communities located in affluent suburban markets and caters to buyers of affordable luxury homes and second homes, to nests empty, active and affordable adults in the United States. segment operates in five geographic locations across the United States. The urban infill segment builds and sells homes in the urban infill markets through Toll Brothers City Living (City Living). It operates its own subsidiaries in architecture, engineering, mortgage, title, land development, golf course development, smart home technology and landscaping.
Toll Brothers has a value rating of A, based on its value score of 10, which is considered a deep value. The company’s Value Score ranking is based on several traditional valuation metrics. The company scores 14 for price / free cash flow ratio, 14 for shareholder return and 19 for the price / sale ratio (remember, the lower the score, the better the value for money). A successful equity investment involves buying low and selling high, so valuation of stocks is an important consideration in stock selection.
The value score is the percentile rank of the average of the percentile ranks of the assessment measures mentioned above as well as the benefit course, price at reservation and enterprise-value-to-Ebitda reports.
Toll Brothers has a Momentum Grade of D, based on its Momentum Score of 35. This means it ranks second among all stocks in terms of weighted relative strength over the past four quarters. The four-quarter weighted relative strength rank is the relative change in prices for each of the last four quarters.
Stocks that meet the criteria for the approach do not represent a “recommended” or “buy” list. It is important to exercise due diligence.
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