Everyone dreams of owning a home, but the Fed’s aggressive monetary policy stance led to mortgage rates rising at the fastest pace in four decades last year, making homes unaffordable.
However, with mortgage rates sliding and the moderation in home prices, the demand for home buying is recovering. To capitalize on the recovering demand for homes, fundamentally strong homebuilder stocks Sekisui House, Ltd. (SKHSY), Tri Pointe Homes, Inc. (TPH), and M/I Homes, Inc. (MHO) could be solid additions to one’s portfolio.
Before discussing these stocks, let’s discuss what’s happening in the mortgage rate space.
Although the Fed’s interest rate hikes do not directly impact mortgage rates, the important players in the mortgage industry keep a close eye on the central bank’s actions. Mortgages usually track the 10-year Treasury rate and move in sync with the rate. Homebuying demand is rising as mortgage rates are following the downward trend of the 10-year treasury yield.
Mortgage rates had hit a 20-year high towards the later part of last year but have declined since December 2022. This led to the sales of new homes increasing 1.1% sequentially in February, indicating that the housing market might be stabilizing. In addition, the sales of previously occupied U.S. homes jumped 14.5% sequentially last month.
NAR’s chief economist Lawrence Yun said, “Conscious of changing mortgage rates, homebuyers are taking advantage of any rate declines.” Amid falling mortgage rates, Freddie Mac’s chief economist Sam Khater said, “On the homebuyer front, the news is more positive with improved purchase demand and stabilizing home prices.”
“If mortgage rates continue to slide over the next few weeks, look for a continued rebound during the first weeks of the spring homebuying season,” he added. Analysts expect mortgage rates to decline further this year.
Bankrate CFA and chief financial analyst Greg McBride believes the mortgage rates will remain volatile in the first half of the year. Still, he believes that as the year progresses, the 30-year fixed mortgage rate will end the year near 5.25%, making home buying much more affordable than before.
Let’s delve deeper into the fundamentals of SKHSY, TPH, and MHO to see what makes them the best picks now.
Sekisui House, Ltd. (SKHSY)
Based in Osaka, Japan, SKHSY designs, constructs, and contracts built-to-order detached houses. The company operates through Custom Detached Houses, Rental Housing, Architectural/Civil Engineering, Remodeling, Real Estate Management Fees, Houses for Sale, Condominiums, Urban Redevelopment, and Overseas segments. It has a market capitalization of $13.74 billion.
In terms of forward EV/Sales, SKHSY’s 0.66x is 39.6% lower than the 1.10x industry average. Its 6.91x forward EV/EBITDA is 24.5% lower than the 9.15x industry average. Likewise, its 7.62x forward EV/EBIT is 40.9% lower than the 12.89x industry average.
SKHSY’s net sales for the fiscal year ended January 31, 2023, increased 13.1% year-over-year to ¥2.93 trillion ($22.32 billion). The company’s operating income increased 13.6% year-over-year to ¥261.49 billion ($1.99 billion). Also, its profit attributable to owners of parent rose 19.9% over the prior-year period to ¥184.52 billion ($1.40 billion). In addition, its EPS came in at ¥276.46, representing an increase of 21.7% year-over-year.
Analysts expect SKHSY’s revenue for the quarter ending April 2023 to increase 2.5% year-over-year to $5.67 billion. Over the past six months, the stock has gained 22.6% to close the last trading session at $20.14.
SKHSY’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates 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.
It has a B grade for Value, Stability, and Quality. It is ranked #4 out of 24 stocks within the B-rated Homebuilders industry. Click here to see the additional ratings of SKHSY for Growth, Momentum, and Sentiment.
Tri Pointe Homes, Inc. (TPH)
TPH designs, constructs, and sells single-family attached and detached homes in the United States. The company operates through a portfolio of six regional homebuilding brands Maracay, Pardee Homes, Quadrant Homes, Trendmaker Homes, TRI Pointe Homes, and Winchester Homes. The company sells its homes through sales representatives and independent real estate brokers.
On February 15, 2023, TPH announced that its board of directors had approved a new stock repurchase program authorizing up to $250 million of common stock through December 31, 2023. This is expected to create shareholder value.
In terms of forward non-GAAP P/E, TPH’s 9.39x is 30.6% lower than the 13.53x industry average. Its 7.24x forward EV/EBITDA is 20.9% lower than the 9.15x industry average. Likewise, its 8.62x forward EV/EBIT is 33.2% lower than the 12.89x industry average.
For the fiscal fourth quarter ended December 31, 2022, TPH’s total homebuilding revenues increased 24.8% year-over-year to $1.51 billion. Its revenues from financial services rose 371.5% over the prior-year period to $17.18 million. The company’s adjusted EBITDA increased 26.2% year-over-year to $324.72 million.
In addition, its net income available to common stockholders rose 37.7% over the prior-year quarter to $202.97 million. Also, its EPS came in at $1.98, representing an increase of 48.9% year-over-year.
For fiscal 2024, TPH’s EPS and revenue are expected to increase 17.5% and 21% year-over-year to $3.10 and $3.87 billion, respectively. It surpassed consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 64.5% to close the last trading session at $24.79.
TPH’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Value and Sentiment. Within the same industry, it is ranked #2. To see the other ratings of TPH for Growth, Stability, and Quality, click here.
M/I Homes, Inc. (MHO)
MHO builds single-family homes in Ohio, Indiana, Illinois, Minnesota, Michigan, Florida, Texas, North Carolina, and Tennessee. The company operates through Northern Homebuilding, Southern Homebuilding, and Financial Services segments. It also designs, constructs, markets, and sells single-family homes and attached townhomes under the M/I Homes brand name.
On January 25, 2023, MHO announced that it had commenced operations in the Fort Myers/Naples, Florida market.
MHO CEO and President Robert H. Schottenstein said, “We are excited to announce that we are commencing operations in the Fort Myers/Naples market. Our existing operations in Orlando, Tampa, and Sarasota, Florida, have been very successful for many years, and opening in Fort Myers/Naples should allow us to build upon that success as we further expand along the southwest coast of Florida.”
In terms of forward non-GAAP P/E, MHO’s 5.49x is 59.4% lower than the 13.53x industry average. Its 0.69x forward EV/Sales is 37.1% lower than the 1.10x industry average. Likewise, its 0.71x forward Price/Book is 71.3% lower than the 2.46x industry average.
MHO’s total revenue increased 15.7% year-over-year to $1.22 billion for the fourth quarter ended December 31, 2022. The number of homes delivered rose 2.9% over the prior-year quarter to 2,384. Its adjusted EBITDA increased 26% year-over-year to $195.76 million.
The company’s adjusted net income increased 27.3% year-over-year to $144.34 million. In addition, its adjusted EPS came in at $5.15, representing an increase of 34.5% year-over-year.
Analysts expect MHO’s EPS and revenue for fiscal 2024 to increase 10.1% and 6.3% year-over-year to $12.24 and $3.67 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 71.2% to close the last trading session at $61.08.
MHO’s POWR Ratings reflect its solid prospects. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Value, Momentum, and Sentiment. It is ranked first in the Homebuilders industry. Click here to see the other ratings of MHO for Growth, Stability, and Quality.
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SKHSY shares were unchanged in premarket trading Tuesday. Year-to-date, SKHSY has gained 15.55%, versus a 3.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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