The homebuilding industry is positioned for solid growth as it plays a crucial role in shaping communities, adapting to evolving homeowner needs, and due to the strong demand for residential properties. With mortgage rates declining from their peak, the demand for new homes will likely rise, thereby benefiting homebuilders.
Considering these factors, it could be wise to invest in fundamentally strong homebuilder stocks: Taylor Morrison Home Corporation (TMHC), PulteGroup, Inc. (PHM), Hovnanian Enterprises, Inc. (HOV), and Sekisui House, Ltd. (SKHSY).
Before delving deeper into their fundamentals, let’s discuss what’s shaping the homebuilder industry’s prospects.
The homebuilder sector is shaped by factors such as population growth, rapid urbanization, rising disposable incomes, and government initiatives promoting affordable housing, contributing to a booming global residential construction market. Home builders endured a rough patch over the past few months as the highest borrowing rates in 22 years struggled to attract home buyers.
However, falling mortgage rates are helping attract potential home buyers again. Mortgage rates have fallen from October’s peak of 8%, helping stimulate home buying again. The fall in mortgage rates has subsequently led to a rise in builder confidence in December for the first time in four months.
According to the National Association of Home Builders (NAHB), builder confidence in the market for newly built single-family homes rose three points to 37 in December. According to the U.S. Census Bureau, new single-family home sales in November 2023 were 590,000, increasing 1.4% year-over-year. The average sales price of new single-family houses was $488,900.
Moreover, construction of new homes is showing revival as privately-owned housing starts in November were at a seasonally adjusted annual rate of 1,560,000, rising 9.3% over the prior-year period and 14.8% above the revised October estimate of 1,359,000. Also, single-family housing starts in November were 1,143,000, increasing 18% over the revised October figure of 969,000.
As long-term interest rates fall, builders are expected to build more houses to meet the rising demand. The global residential construction market is expected to grow at a CAGR of 4.8% to reach $8.31 billion by 2032.
Considering these conducive trends, let’s analyze the fundamentals of the four Homebuilders industry picks, beginning with the fourth choice.
Stock #4: Taylor Morrison Home Corporation (TMHC)
TMHC and its subsidiaries operate as a public homebuilder in the United States. The company designs, builds, and sells single and multi-family detached and attached homes, and develops lifestyle and master-planned communities.
In terms of the trailing-12-month net income margin, TMHC’s 11.05% is 146.6% higher than the 4.48% industry average. Its 15.71% trailing-12-month EBIT margin is 106.7% higher than the 7.60% industry average. Likewise, the stock’s 10.33% trailing-12-month Return on Total Assets is 158.6% higher than the 4% industry average.
For the fiscal third quarter that ended September 30, 2023, TMHC’s total revenues stood at $1.68 billion. The company’s adjusted net income and adjusted earnings per common share came in at $179.69 million and $1.62, respectively. Its adjusted EBITDA stood at $275.49 million.
Also, as of September 30, 2023, TMHC’s total liabilities came in at $3.26 billion compared to $3.82 billion as of December 31, 2022.
TMHC surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 58.6% to close the last trading session at $52.07.
TMHC’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 Value and Momentum. It is ranked #7 out of 24 stocks in the B-rated Homebuilders industry. Click here to see TMHC’s Growth, Stability, and Quality ratings.
Stock #3: Hovnanian Enterprises, Inc. (HOV)
HOV designs, constructs, markets, and sells residential homes in the United States. They offer single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes with amenities such as clubhouses, swimming pools, tennis courts, tot lots, and open areas.
In terms of the trailing-12-month EBIT margin, HOV’s 9.98% is 31.3% higher than the 7.60% industry average. Its 10.77% trailing-12-month levered FCF margin is 99.4% higher than the 5.40% industry average. Likewise, the stock’s 1.09x trailing-12-month asset turnover ratio is 10.3% higher than the 0.99x industry average.
HOV’s net sales for the fiscal fourth quarter that ended October 31, 2023, increased marginally year-over-year to $887.03 million. The company’s net income available to common stockholders and net income per common share rose 78.6% and 80.2% over the prior-year quarter to $94.60 million and $13.05, respectively. Additionally, its adjusted EBITDA came in at $181.22 million, up 25.5% year-over-year.
Over the past nine months, HOV’s stock has gained 147.1% to close the last trading session at $162.75.
HOV’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 Value and Momentum and a B for Growth. Within the same industry, it is ranked #6. To see HOV’s Stability, Sentiment, and Quality ratings, click here.
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 November 29, 2023, PHM announced its return to the Salt Lake City market, revealing plans to open two new Pulte Homes communities in early 2024. The communities, Jordanelle Ridge and Deep Creek at Jordanelle Ridge will offer a total of 64 single-family homes and 114 townhomes, providing diverse floorplans and amenities in a desirable location near Park City.
In terms of the trailing-12-month EBIT margin, PHM’s 21.17% is 178.6% higher than the 7.60% industry average. Its 21.63% trailing-12-month EBITDA margin is 98.3% higher than the 10.91% industry average. Likewise, the stock’s 19.23% trailing-12-month Return on Total Capital is 217.7% higher than the 6.05% industry average.
For the fiscal third quarter that ended on September 30, 2023, PHM’s total revenues increased 2.8% year-over-year to $4 billion. The company’s net income came in at $638.78 million, representing a 1.7% year-over-increase, while its EPS grew 7.8% from the prior-year quarter to $2.90.
Street expects PHM’s revenue for the quarter ending June 30, 2024, to increase 0.3% year-over-year to $4.20 billion. Its EPS for the fiscal year that ended on December 31, 2023, is expected to increase 5.9% year-over-year to $11.53. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 77.1% to close the last trading session at $105.82.
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 #5 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.
Stock #1: Sekisui House, Ltd. (SKHSY)
Headquartered in Osaka, Japan, SKHSY designs, constructs, and contracts built-to-order detached houses in Japan and internationally. 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.
In terms of the trailing-12-month net income margin, SKHSY’s 5.91% is 31.9% higher than the 4.48% industry average. Likewise, its 5.15% trailing-12-month Return on Total Assets is 28.9% higher than the industry average of 4%. Furthermore, the stock’s 3.45% trailing-12-month Capex/Sales is 13.5% higher than the industry average of 3.04%.
For the nine months that ended on October 31, 2023, SKHSY’s net sales increased 2.8% year-over-year to ¥2.19 trillion ($15.05 billion). Its operating profit amounted to ¥186.69 billion ($1.28 billion). Additionally, its profit attributable to owners of parent and profit per share amounted to ¥141.89 billion ($974.78 million) and ¥216.23, respectively.
Also, as of October 31, 2023, its total assets stood at ¥3.43 trillion ($22.19 billion), compared to $3.01 trillion ($20.68 billion) as of January 31, 2023.
For the quarter ending December 31, 2024, SKHSY’s revenue is expected to increase 5.1% year-over-year to $6.17 billion. Over the past year, the stock has gained 27.7% to close the last trading session at $22.88.
SKHSY’s POWR Ratings reflect a positive outlook. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has a B grade for Value, Momentum, Stability, and Quality. It is ranked first in the Homebuilders industry. In total, we rate SKHSY on eight different levels. Beyond what we stated above, we also have given SKHSY grades for Growth and Sentiment. Get all the SKHSY ratings here.
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PHM shares were trading at $104.68 per share on Friday afternoon, down $1.14 (-1.08%). Year-to-date, PHM has gained 1.41%, versus a 0.27% 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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