The homebuilding industry is vital for shaping communities, as it adapts to homeowners' evolving needs and fosters residential community growth. Moreover, robust demand from homeowners is bolstering the industry. So, I think investors could consider buying quality homebuilder stocks Toll Brothers, Inc. (TOL), Sekisui House Ltd. (SKHSY), and M/I Homes, Inc. (MHO) for November.
New home sales in the U.S. rebounded 12.3% to a seasonally adjusted annual rate of 759,000 units last month, the highest level since February 2022. Sales accelerated 33.9% on a year-on-year basis in September.
In addition, the global real estate market is on a steady rise, with a projected value of $113.60 trillion this year. Residential real estate takes the lead, expected to reach a market volume of $88.91 trillion in the same year. The US homebuilder market is anticipated to expand at a CAGR of 4.7% to reach $142.90 trillion by 2028.
Moreover, driven by population growth, rapid urbanization, increasing disposable incomes, and government initiatives promoting affordable housing, the global residential construction market is booming.
The housing market is quickly incorporating smart home technologies in construction projects. These technologies, including automation, energy management, and interconnected devices, improve convenience, comfort, and energy efficiency for a superior living experience.
The Global Residential Construction Market is expected to grow to $8.31 billion by 2032, at a 4.8% CAGR.
Furthermore, fearing the effects of surging interest rates on the housing market, representatives from the banking and real estate industries have urged the Federal Reserve to halt rate hikes.
If the Fed heeds the concerns, then lower mortgage rates could encourage more people to buy homes, which would increase demand in the housing market. This increased demand can benefit the home-building industry by driving sales of new homes.
Considering these conducive trends, let’s look at the fundamentals of the three best Homebuilder stocks, starting with number 3.
Stock #3: Toll Brothers, Inc. (TOL)
TOL is a widely recognized real estate firm in the United States specializing in luxury home design, construction, and sales. It also builds upscale communities with various amenities, provides single-story housing, and engages in land development and apartment rentals. The company caters to a wide range of customer segments, making it a luxury residential real estate market leader.
TOL’s trailing-12-month EBIT and net income margins of 17.94% and 14.66% are higher than the industry averages of 7.36% and 4.33%.
On November 2, 2023, TOL’s Toll Brothers Apartment Living rental division, and Canyon Partners Real Estate collaborated to build Navona, a garden-style 400-unit luxury rental community in Mesa, Arizona. The project received a $78 million construction loan from Bank OZK (OZK) and is strategically located in a fast-growing Phoenix submarket.
The partnership strengthens TOL's presence in Arizona and reflects its continued expansion into the luxury rental market, as evidenced by its successful collaboration with Canyon Partners.
On November 1, TOL launched Meridian Walk at Princeton, a luxurious townhome development situated in a picturesque woodland setting. The development is well-positioned for success because it is close to dining and shopping options, and has access to highly esteemed schools in the West Windsor-Plainsboro district.
Townhomes with flexible layouts that suit a range of lifestyles are available, and future features like a fitness center, clubhouse, and outdoor pool will likely increase the community's appeal and highlight TOL's dedication to providing premium housing options.
During the third quarter ended July 31, 2023, TOL's net income and EPS amounted to $414.79 million and $3.73, up 51.7% and 58.7% year-over-year, respectively. Its income from operations grew 42.4% year-over-year to $515.11 million.
Additionally, adjusted home sales gross margin increased 24.4% compared to the previous fiscal year's third quarter, amounting to $783.02 million.
In the fourth quarter of 2023, TOL expects to deliver 2,650 to 2,750 homes at an average price of $1,005,000 to $1,025,000 per unit. The adjusted home sales gross margin is projected to be 28.5% in the same quarter.
Analyst expects TOL’s revenue and EPS to increase 1.1% and 8.1% year-over-year to $1.80 billion and $1.84 respectively for the fiscal first quarter ending January 2024. The company has surpassed the revenue and EPS estimates in each of the trailing four quarters, which is impressive.
Shares of TOL have risen 69.8% over the past year and 48.7% year-to-date to close the last trading session at $74.25.
TOL’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
TOL has an A grade for Momentum and a B for Value and Quality. Within the B-rated Homebuilders industry, it is ranked #4 out of 24 stocks.
Click here for TOL’s additional Growth, Stability and Sentiment ratings.
Stock #2: Sekisui House Ltd. (SKHSY)
Headquartered in Osaka, Japan, SKHSY specializes in creating, building, and contracting custom detached homes both domestically and internationally. Additionally, they work on civil engineering projects, build office and commercial buildings, remodel, and sell real estate, among other real estate-related activities.
SKHSY’s trailing-12-month EBIT and net income margins of 8.09% and 5.83% are higher than the industry averages of 7.36% and 4.33%.
For the six months ended July 31, 2023, the company's net sales amounted to ¥1.46 trillion ($9.68 trillion), up 2.7% year-over-year. It generated an operating income of ¥124.92 billion ($826.52 million) and a gross profit of ¥293.37 billion ($1.94 billion). Additionally, its ordinary income amounted to ¥125.24 billion ($828.64 million).
Street expects SKHSY’s revenue to grow 133.6% year-over-year to $20.66 billion for the fiscal year ending January 2024.
The stock has soared 19.9% over the past year and 12.9% year-to-date to close the last trading session at $19.67.
SKHSY’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
SKHSY has a B grade for Value, Momentum, Stability, and Quality. Within the same industry, it is ranked #2.
In addition to the POWR Ratings stated above, one can see SKHSY’s additional POWR Ratings for Growth and Sentiment here.
Stock #1: M/I Homes, Inc. (MHO)
MHO builds and sells single-family homes and townhomes in several states. They cater to a wide range of homebuyers and provide financial services such as mortgages and title insurance. The company operates across multiple regions and has distinct segments dedicated to homebuilding and financial services.
MHO’s trailing-12-month EBIT and net income margins of 14.74% and 11.47% are higher than the industry averages of 7.36% and 4.33%.
During the third quarter ended September 30, 2023, MHO's recorded net income of $139.02 million, up 5.6% year-over-year. Its operating income and gross margin grew 2.9% and 3.6% year-over year to $172.13 million and $281.73 million respectively.
MHO's EPS rose 3.2% year-over-year to $4.82. Moreover, the company's non-GAAP adjusted EBITDA grew 3.3% year-over-year to $185.18 million
MHO’s revenue is expected to grow 1.8% year-over-year to $1.02 billion, while EPS is likely to be $3.36 for the first quarter ending March 2024. The company has surpassed the estimates in each of the trailing three quarters, which is impressive.
The stock has soared 108.5% over the past year and 86.9% year-to-date to close the last trading session at $86.29.
MHO’s POWR Ratings reflect this sound outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
MHO has an A grade for Momentum and a B for Value, Sentiment, and Quality. Within the same industry, it is ranked first.
To see MHO’s additional POWR Ratings for Growth and Stability click here.
What To Do Next?
43-year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with a trading plan and top 11 picks for the year ahead.
SKHSY shares were trading at $19.79 per share on Thursday morning, up $0.12 (+0.62%). Year-to-date, SKHSY has gained 13.54%, versus a 13.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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