The home building industry is expected to grow significantly this year amid sustained demand and tight housing inventory. As a result of Russia’s attack on Ukraine, mortgage rates are declining. This is expected to increase the purchasing power of homebuyers.
According to a CoreLogic report, home price growth in January has been the highest in 45 years. This trend will likely continue, thanks to declining mortgage rates and increased seasonal demand this spring. The bullish sentiment surrounding the homebuilding industry is evident in the Hoya Capital Housing ETF’s (HOMZ) 9.3% rise over the past year.
Given these factors, Wall Street analysts expect quality homebuilding stocks KB Home (KBH) and M.D.C. Holdings, Inc. (MDC) to rally in price in the coming months.
KB Home (KBH)
Los Angeles-based KBH is an American homebuilding company. It operates through four segments: West Coast; Southwest; Central; and Southeast. The company builds and sells various homes and offers financial services. It has operations in Arizona, California, Colorado, Florida, North Carolina, Nevada, Texas, and Washington.
On March 5, 2022, KBH opened Lotus at the Seasons, a new single-family home community in Chino, California. The opening is expected to boost the company’s revenue streams.
On Feb.25, 2022, KBH announced the opening of Allegro, a new single-family home community in Elk Grove, California, and Bartlett and Cortland at Mason Trails, new home communities situated in Roseville, Calif. These openings might expand the company’s customer base and boost its home sales.
In its fiscal year 2021 fourth quarter, ended Nov. 30, 2021, KBH's total revenues increased 40.3% year-over-year to $1.68 billion. KBH's total pretax income grew 77.6% year-over-year to $223.93 million. And the company's net income rose 64.2% from the same period last year to $174.23 million. KBH’s earnings per share increased 70.5% year-over-year to $1.91.
The $1.48 billion consensus revenue estimate for its fiscal year 2022 first quarter, ending Feb. 28, 2022 represents 30% year-over-year growth. The $1.54 consensus EPS estimate for the to-be-reported quarter represents 50.9% year-over-year growth. The company has an impressive earnings surprise history; it surpassed the consensus EPS estimates in three of the trailing four quarters.
KBH stock has declined 17.2% in price year-to-date. However, the 12-month median price target of $59.60 indicates a 60.8% potential upside from yesterday’s closing price of $37.06. Among 11 Wall Street analysts that rated KBH, nine rated it Buy, one rated it Hold, while one rated it Sell. The price targets range from a low of $38.00 to a high of $73.00.
M.D.C. Holdings, Inc. (MDC)
MDC in Denver, Colo., is in the homebuilding and financial services businesses. The company’s homebuilding operations include purchasing finished or developing lots for the construction and sale of single-family detached homes to homebuyers under the Richmond American Homes name. MDC’s financial services operations include mortgage loans, insurance products, and title agency services.
This month, Richmond American Homes of Texas, Inc., a subsidiary of MDC, announced that Seasons at Carillon in the Austin area had opened for sales. This introduction of a new community is expected to boost the company’s sales.
MDC's home sale revenues increased 21.5% year-over-year to $1.44 billion in its fiscal year 2021 fourth quarter, ended December 31, 2021. Its gross profit from home sales improved 29.5% year-over-year to $336.58 million. MDC’s income before income taxes increased 22.1% year-over-year to $209.15 million. And the company’s net income grew 10.3% year-over-year to $162.66 million. Its earnings per share rose 8.9% year-over-year to $2.21.
Analysts expect MDC's revenue for its fiscal year 2022 first quarter, ending March 31, 2022, to come in at $1.22 billion, representing a 12.5% rise year-over-year. The Street expects the company's EPS for the current quarter to be $1.90, representing a 26.1% increase year-over-year. The company has an impressive earnings surprise history; it surpassed the consensus EPS estimates in three of the trailing four quarters.
Over the past year, MDC stock has slumped 23.4% in price. However, the 12-month median price target of $65.00 indicates a 54.7% potential upside from yesterday’s closing price of $42.01. Among the three Wall Street analysts that rated MDC, one rated it Buy, while two rated it Hold. The price targets range from a low of $56.00 to a high of $73.00.
KBH shares were trading at $38.55 per share on Tuesday afternoon, up $1.49 (+4.02%). Year-to-date, KBH has declined -13.50%, versus a -10.65% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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