The homebuilder market shows promise as potential Fed rate cuts in September could lead to lower mortgage rates, sparking increased housing demand and supply. While the effects may unfold gradually, steady rate declines are expected to benefit homebuilders, buyers, and sellers alike, creating a balanced market without overwhelming demand spikes that could strain supply.
Considering this outlook, it could be wise to keep an eye on quality homebuilder stocks: PulteGroup, Inc. (PHM) and NVR, Inc. (NVR).
The U.S. economy grew at an annualized rate of 3.0% in Q2, surpassing the 1.8% non-inflationary target. Inflation is approaching the Fed’s 2% goal, easing price concerns. Notably, a 25-basis point rate cut is expected soon, lowering borrowing costs, while unemployment is projected to remain stable at 4.2%, signaling steady job availability.
Alongside, mortgage rates have fallen to 6.20%, the lowest since February 2023, but affordability remains tight due to high home prices and supply shortages. Therefore, the Fed rate cut next week could lower rates further, boosting the homebuilder market. The U.S. residential construction market is projected to grow at a 4.5% CAGR until 2028.
Furthermore, the homebuilder sector thrives on population growth, urbanization, rising incomes, and government efforts for affordable housing, all driving robust market expansion and positioning the industry for sustained growth. Considering these conducive trends, let’s analyze the fundamental aspects of the two Homebuilders industry picks to watch, beginning with the second choice.
Stock #2: 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 September 4, 2024, PHM announced a quarterly cash dividend of $0.20 per share, payable on October 2, 2024, to shareholders of record as of September 17, 2024.
On July 9, 2024, PHM announced the pre-sale of Deep Creek at Jordanelle Ridge, its first Utah community in over 20 years. Located in Heber City, it offers outdoor living with city conveniences, featuring eight home designs starting in the mid-$700Ks, along with upcoming townhomes and amenities.
In terms of the trailing-12-month EBIT margin, PHM’s 21.59% is 174% higher than the 7.88% industry average. Its 22.09% trailing-12-month EBITDA margin is 93.1% higher than the 11.44% industry average. Also, the stock’s 26.92% trailing-12-month Return on Common Equity is 136.4% higher than the 11.39% industry average.
PHM’s total revenues for the fiscal second quarter that ended on June 30, 2024, increased 9.8% year-over-year to $4.60 billion. The company’s net income came in at $809.13 million, representing a 12.3% year-over-increase, while its EPS grew 19.3% over the prior-year quarter to $3.83.
Street expects PHM’s revenue for the quarter ending September 30, 2024, to increase 7.1% year-over-year to $4.29 billion. Its EPS for the same quarter is expected to increase 10.1% year-over-year to $3.19. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 72.6% to close the last trading session at $135.30.
PHM’s positive outlook is 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 is ranked #3 out of 23 stocks in the B-rated Homebuilders industry. It has an A grade for Momentum and a B for Sentiment and Quality. To access PHM’s grades for Growth, Value, and Stability, click here.
Stock #1: 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 16.18% is 257.8% higher than the 4.52% industry average. Its 20.29% trailing-12-month EBIT margin is 157.5% higher than the 7.88% industry average. Likewise, the stock’s 25.57% trailing-12-month Return on Total Assets is 526.9% higher than the 4.08% industry average.
For the fiscal second quarter ended June 30, 2024, NVR’s revenue increased 11.6% year-over-year to $2.55 billion, and its operating income was $495.25 million, up 12.2% from the year-ago value. Its net income was $400.90 million. Additionally, the company’s EPS rose 3.6% from the prior-year quarter to $120.69.
Analysts expect NVR’s EPS and revenue for the quarter ending September 30, 2024, to increase 5% and 7.1% year-over-year to $131.52 and $2.69 billion, respectively. NVR surpassed the Street EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 40.4% to close the last trading session at $9,179.38.
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.
It has an A grade for Momentum and a B for Sentiment and Quality. It is ranked #2 in the Homebuilders industry. Click here to see NVR’s Growth, Value, and Stability ratings.
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NVR shares were trading at $9,309.26 per share on Friday afternoon, up $129.88 (+1.41%). Year-to-date, NVR has gained 32.98%, versus a 18.94% 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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