Forestar Group Inc. (FOR) in Arlington, Tex., is a residential lot development company that is focused primarily on selling finished single-family residential lots to homebuilders. It operates through its real estate segment, acquiring land and developing infrastructure for single-family residential communities and selling residential single-family finished lots to local, regional, and national homebuilders.
On the back of record-low mortgage rates, housing demand has skyrocketed in the last two years. Home prices have surged due to robust housing demand and low inventory. According to Freddie Mac, home sales are expected to hit 6.90 million this year and 7 million in 2023. However, because mortgage rates are now climbing, FOR’s near-term prospects look uncertain despite its sound financials.
FOR stock has declined 8.5% in price over the past month and have lost 35.3% over the past year to close the last trading session at $16.68. It is currently trading 37% below its 52-week high of $26.46, which it hit on April 21, 2022.
Here is what could influence FOR’s performance in the upcoming months:
Robust Financials
FOR’s revenues increased 32.7% year-over-year to $407.60 million for its first quarter, ended Dec. 31, 2021. The company’s net income increased 83.2% year-over-year to $40.50 million. Also, its EPS came in at $0.81, representing an increase of 76% year-over-year. In addition, it sold 4,516 residential lots, representing a 26.6% year-over-year increase.
Favorable Analyst Estimates
Analysts expect FOR’s revenues to grow 27.8% in its fiscal year 2022 and 20.8% in its fiscal year 2023. Its EPS for its fiscal years 2022 and 2023 are expected to increase 39.4% and 19.6% year-over-year, respectively.
Discounted Valuation
In terms of forward non-GAAP P/E, FOR’s 4.68x is significantly lower than the 42.02x industry average. Also, its trailing-12-month EV/EBITDA and EV/EBIT of 7.39x and 7.50x, respectively, are 66.8% and 84.2% lower than the 22.25x and 47.73x industry averages.
Low Profitability
In terms of trailing-12-month Capex/Sales, FOR’s 0.21% is 94% lower than the 3.55% industry average. And its trailing-12-month EBIT margin and EBITDA margin of 12.90% and 13.09%, respectively, are lower than the 23.14% and 56.20% industry average.
POWR Ratings Reflect Uncertainty
FOR has an overall C rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. FOR has a D grade for Quality, which is consistent with its 18.12% trailing-12-month gross profit margin, which is 73.2% lower than the 67.81% industry average.
It has a C grade for Momentum. The stock is currently trading below its 50-day and 200-day moving averages of $17.83 and $19.67, respectively, justifying the Momentum grade.
Among the 46 stocks in the D-rated Real Estate Services industry, FOR is ranked #13.
Beyond what I have stated above, view FOR’s ratings for Growth, Value, Stability, and Sentiment here.
Bottom Line
Despite trading at a discounted valuation, FOR’s near-term prospects look uncertain due to high mortgage rates, which have risen to their highest levels since February 2011. Thus, we think it could be wise to wait for a better entry point in the stock.
How Does Forestar Group Inc. (FOR) Stack Up Against its Peers?
FOR has an overall POWR Rating of C, which equates to a Neutral rating. Therefore, one might want to consider investing in other Real Estate Services stocks with an A (Strong Buy) or B (Buy) rating, such as Marcus & Millichap, Inc. (MMI), The RMR Group Inc. (RMR), and Jones Lang LaSalle Incorporated (JLL).
FOR shares were trading at $17.34 per share on Tuesday afternoon, up $0.66 (+3.96%). Year-to-date, FOR has declined -20.28%, versus a -6.46% 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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