The construction industry’s future is promising due to declining mortgage rates, strong demand for residential properties, population growth, urbanization, rising disposable incomes, and government initiatives promoting affordable housing. These factors contribute to a booming global residential construction market in 2024.
Considering these factors, it could be wise to invest in fundamentally strong construction stocks, NVR, Inc. (NVR), Toll Brothers, Inc. (TOL), and PulteGroup, Inc. (PHM) for future gains.
Builders anticipate a drop in mortgage rates later this year as inflation eases. With steady home prices and incentives, potential Fed rate cuts in September 2024 could lower borrowing costs, boosting demand for new homes and benefiting the construction industry.
In June 2024, the annual rate of completed private homes reached 1.71 million, up 10.1% from May and 15.5% from June 2023. Single-family home completions were 1.04 million, up 1.8% from May. This rise boosts construction demand, benefiting homebuilders with increased revenue and promoting industry growth.
Furthermore, the rising number of multi-family housing starts is expected to boost the construction industry in the near future. High home completion rates and a recovering manufacturing sector support ongoing growth, making future investment prospects promising.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Homebuilders industry picks, beginning with the third choice.
Stock #3: NVR, Inc. (NVR)
NVR operates as a homebuilder in the United States. The company operates through its Homebuilding and Mortgage Banking segments. It engages in the construction and sale of single-family detached homes, townhomes, and condominium buildings under the Ryan Homes, NVHomes, and Heartland Homes names.
In terms of the trailing-12-month net income margin, NVR’s 16.67% is 239.7% higher than the 4.91% industry average. Its 20.23% trailing-12-month EBIT margin is 159.9% higher than the 7.78% industry average. Likewise, the stock’s 25.11% trailing-12-month Return on Total Assets is 493.9% higher than the 4.23% industry average.
For the fiscal first quarter ended March 31, 2024, NVR’s revenue increased 7.5% year-over-year to $2.29 billion, and its operating income stood at $448.33 million, up 8.6% from the year-ago value. Its net income rose 14.5% year-over-year to $394.27 million. In addition, the company’s EPS increased 16.5% over the prior-year quarter to $116.41.
Analysts expect NVR’s EPS and revenue for the quarter ended June 30, 2024, to increase 4% and 11.5% year-over-year to $121.21 and $2.55 billion, respectively. NVR surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 46.3% to close the last trading session at $8,407.66.
NVR’s strong prospects are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Sentiment and Quality. It is ranked #6 out of 22 stocks in the B-rated Homebuilders industry. Click here to see NVR’s Growth, Value, and Stability ratings.
Stock #2: Toll Brothers, Inc. (TOL)
TOL and its subsidiaries design, build, market, sell, and arrange financing for a range of detached and attached homes in luxury residential communities. It also designs, builds, markets, and sells condominiums through Toll Brothers City Living.
In terms of the trailing-12-month EBIT margin, TOL’s 19.64% is 152.4% higher than the 7.78% industry average. Its 9.13% trailing-12-month levered FCF margin is 68.5% higher than the 5.42% industry average. Similarly, the stock’s 13.08% trailing-12-month Return on Total Capital is 108.6% higher than the 6.27% industry average.
TOL’s net sales for the fiscal second quarter that ended April 30, 2024, increased 13.2% year-over-year to $2.84 billion. The company’s adjusted net income and adjusted EPS rose 11.6% and 18.6% over the prior-year quarter to $357.50 million and $3.38, respectively. Additionally, its adjusted home sales gross margin came in at $746.91 million, up 5.8% year-over-year.
For the quarter ending July 31, 2024, TOL’s revenue is expected to grow marginally year-over-year to $2.71 billion. Its EPS for the quarter ending January 31, 2025, is expected to increase 2.7% year-over-year to $2.31. It surpassed the Street EPS and revenue estimates in each of the trailing four quarters. Over the past nine months, TOL’s stock has gained 86.4% to close the last trading session at $131.36.
TOL’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Quality. Within the same industry, it is ranked #5. To see TOL’s Growth, Value, Stability, and Sentiment ratings, click here.
Stock #1: PulteGroup, Inc. (PHM)
PHM engages in the homebuilding business in the United States. It acquires and develops land primarily for residential purposes and constructs housing on such land. The company also offers various home designs under the Centex, Pulte Homes, Del Webb, DiVosta Homes, American West, and John Wieland Homes and Neighborhoods brand names.
On July 9, 2024, PHM announced the pre-sale launch of Deep Creek at Jordanelle Ridge, its first Utah community in over 20 years, offering a blend of outdoor living and city conveniences in Heber City. The new development features eight home designs starting in the mid-$700Ks, with townhomes and additional amenities coming soon.
On July 3, 2024, PHM broke ground on Ryehill and Del Webb Sugar Land at Ryehill in Sugar Land, Texas, marking the launch of new master-planned communities featuring approximately 2,500 homes. The development will offer a range of housing options and amenities, with a special focus on modern living and 55-plus active adult lifestyles.
In terms of the trailing-12-month EBIT margin, PHM’s 21.55% is 177% higher than the 7.78% industry average. Its 22.06% trailing-12-month EBITDA margin is 94.8% higher than the 11.32% industry average. Also, the stock’s 27.22% trailing-12-month Return on Common Equity is 129.8% higher than the 11.85% industry average.
PHM’s total revenues for the fiscal first quarter that ended on March 31, 2024, increased 10.4% year-over-year to $3.95 billion. The company’s net income came in at $662.98 million, representing a 24.6% year-over-increase, while its EPS grew 31.9% from the prior-year quarter to $3.10.
Street expects PHM’s revenue for the quarter ended June 30, 2024, to increase 7.4% year-over-year to $4.50 billion. Its EPS for the same quarter is expected to increase 9.2% year-over-year to $3.27. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 73.8% to close the last trading session at $124.80.
It’s no surprise that PHM has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #4 in the Homebuilders industry. It has an A grade for Momentum and a B for Quality. Click here to see PHM’s additional ratings for Growth, Value, Stability, and Sentiment.
What To Do Next?
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PHM shares were trading at $125.17 per share on Friday afternoon, up $0.37 (+0.30%). Year-to-date, PHM has gained 21.48%, versus a 16.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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