The U.S. homebuilding market seems to have taken a brief hiatus. Existing home sales and new home sales data from Dec 2016 throw light on the adversities plaguing the industry.
U.S. existing home sales fell 2.8% in December to a seasonally adjusted rate of 5.49 million units. Again, on Jan 26, the Commerce Department said that new home sales fell 10.4% to a seasonally adjusted annual rate 536,000 in the same month.
The positive momentum at the start of 2017 seems to have lost steam as mortgage rates have been inching up since the November presidential election.
Optimism surrounding Donald Trump’s plans to spur economic growth through tax cuts and easier regulations prompted a rise in Treasury yields and a corresponding rise in mortgage rates.
A rise in mortgage rates is undeniably the most dampening factor for the homebuilding industry. Mortgage rates were up significantly in December to 4.32% from 3.5% in early November. Rising interest rates and housing prices are probably diluting demand for homes in the U.S. and affordability is also becoming an issue.
Nevertheless, the bigger picture is strikingly different. Sales of new homes rose 12.2% in 2016 from a year earlier ??? marking the best in a decade.
Sales growth during 2016 was majorly boosted by affordable mortgage rates and a steadily improving job market.
Homebuilders Quarterly Update So Far
PulteGroup, Inc. (PHM), which is primarily a single-family homes seller, posted earnings of 67 cents in the fourth quarter of 2016, up 17.5% and above the consensus estimate by 15.5%. Revenues also climbed 20.9% year over year. The average price of homes sold grew to $391,000 from $353,000 a year earlier, while the number of homes sold rose to 6,197 from 5,662. Unit backlog increased 10%, with the value of backlog climbing 20%.
Again, D.R. Horton, Inc. (DHI) exhibited an impressive performance in the first quarter of fiscal 2017, with earnings and revenues beating the Zacks Consensus Estimate. The company expects to perform reasonably well in fiscal 2017 on the back of its robust backlog position and well-stocked inventory of land, lots and homes.
KB Home‘s (KBH) fourth-quarter 2016 earnings and sales surpassed analysts’ expectations by 8% and 2%, respectively. The company concluded 2016 with an impressive 21% growth in revenues and double-digit rise in deliveries and housing revenues.
Overall, the picture isn’t that dreary after all. The construction sector’s earnings are expected to increase by 12.5% in Q4 as compared with 7.1% earnings growth in the preceding quarter. Revenues are also expected to improve 6.6% overall (5.5% growth in Q3). For 2016, earnings will probably rise 6.7% (versus 7.1% seen in 2015) on 3.5% revenue growth (3.3% a year ago) while margins are expected to decline to 0.20% (0.23% a year ago).
In spite of the economic woes, it is a profitable strategy to zero in on a handful of homebuilders that are poised to beat earnings this quarter. An earnings beat would also pave the way for stock price appreciation.
Which are the Right Picks?
Picking the right stock for your portfolio could appear to be a daunting task given the wide range of companies in the construction space. One way to confine the list of choices during this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP. The combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) with a positive Earnings ESP usually hints at an earnings beat.
Earnings ESP is our proprietary methodology for determining which stocks have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
For investors seeking to apply this strategy to their portfolio, we have highlighted three homebuilding stocks that may stand out this season.
Homebuilding Stocks to Top Q4 Earnings: M.D.C. Holdings, Inc. (MDC)
M.D.C. Holdings, Inc. (MDC) engages in homebuilding and financial services businesses in the U.S. It is slated to report Q4 numbers before the market opens on Feb 1. M.D.C. Holdings ended the third quarter with solid backlog of $1.61 billion, up 37% year over year.
Shares of M.D.C. Holdings gained nearly 30% in the last one year, outpacing the Zacks categorized Building-Residential/Commercial industry growth of 19.2%.
The combination of an Earnings ESP of +8.82% and a Zacks Rank #2 raises the possibilities of an earnings beat for the company. You can see the complete list of today’s Zacks #1 Rank stocks here.
For the fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 68 cents a share, reflecting a rise of 55.8% year over year, while the consensus for revenues is at $679.6 million, implying 17.4% year-over-year growth.
Meanwhile, the company boasts a decent VGM score of “B” and has a solid 3-5 year EPS expected growth rate of 18%.
Homebuilding Stocks to Top Q4 Earnings: Century Communities, Inc (CCS)
Century Communities, Inc (CCS) which engages in homebuilding business in Atlanta, Central Texas, Colorado, Houston and Nevada, will release its fourth-quarter results after market close on Feb 14. This Zacks Rank #2 stock has an Earnings ESP of +14.93%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
In addition to Century Communities, the company also owns brands such as Grand View Builders and Jimmy Jacobs Homes. With these brands, Century Communities has a diverse price range of homes to offer.
The company ended the third quarter with a strong backlog, highlighting an increase of 17.3% from the prior-year quarter.
The Zacks Consensus Estimate for the quarter’s earnings is pegged at 67 cents, up 8.1% year over year. The consensus for revenues is pegged at $273.4 million, reflecting 32.5% year-over-year growth.
In addition to an encouraging outlook, Century Communities’ recent history has been impressive. The stock topped earnings consensus in each of the last four quarters, having an average positive surprise of 5.11%.
Shares of Century Communities climbed 58.1% in the last one year, outperforming the broader industry.
Homebuilding Stocks to Top Q4 Earnings: William Lyon Homes (WLH)
William Lyon Homes (WLH) is mainly engaged in the design, construction, marketing and sale of single-family detached and attached homes in California, Arizona, Nevada and Colorado.
This leading homebuilder in the Western U.S. ended third quarter with backlog of 1,071 units and an associated value of $591.0 million, the highest in over 10 years.
Shares outpaced the broader industry, gaining more than 64% in the last one year.
For the fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 66 cents on revenues of $466.2 million.
For the upcoming release, Lyon William has an Earnings ESP of +1.52% and a Zacks Rank #3. The company is slated to report fourth-quarter results around Feb 22, before the opening bell.
The Building-Residential/Commercial industry is currently among the top 15% of all 265 industries ranked by Zacks.
However, we have to remain a little cautious about the rate hikes scheduled in the days ahead. Following the modest 25-basis point hike last month, the Fed has expressed its confidence in the U.S. economy and forecasts three hikes in 2017, up from the two projected in Sep 2016. Also, a booming economy boosts income. In view of this, it is worth mentioning that if the rise in income offsets the increase in mortgage payment, the housing market is likely to do just fine.
And if homebuilding gets a boost, can the broader construction sector be left far behind? A close look at the space for some outperformers, backed by a solid Zacks Rank and a positive Zacks Earnings ESP, could be a great idea for investors to tap into the optimism in the sector.
Zacks’ Top 10 Stocks for 2017
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