U.S. homebuilding companies have been riding high in recent years and the March quarter was no exception. Most of the notable homebuilders reported stellar results, beating on both top and bottom lines. The positive momentum is likely to continue through 2018 given the solid earnings outlook and favorable economic fundamentals.
The Q1 earnings season has heated up with 100% of construction companies having already released their numbers. And the showing has been good for these players with an earnings and revenue beat ratio of 69.2% and 84.6%, respectively.
Per the latest Earnings Outlook, the construction sector’s earnings increased 47.3% in the first quarter, a sharp rise from the 20.6% earnings growth registered in the preceding quarter. The sector also registered top-line growth of 20.3% (13.3% growth in Q4).
The industry has been registering solid revenues over the past five years after having slumped during the 2009-2011 time frame. Steady job and wage growth, a recovering economy, rising rentals and rapidly increasing household formation are some of the factors that have been supporting the recovery.
Meanwhile, a low supply level in both new and existing homes ensures strong demand and pricing. As the economy continues to improve and the millennial generation comes of age, pent-up demand for homes will continue to be released.
Although U.S. economic growth cooled in the first quarter to an annualized pace of 2.3% after averaging higher than 3% in the previous three quarters, the economy is likely to rebound in the coming quarters as the labor market is near full employment and both business and consumer confidence are strong.
Market pundits are of the opinion that growth will accelerate in the second quarter as the industry starts to feel the impact of the Trump administration’s $1.5 trillion income tax package on their paychecks.
Will Hawkish Fed & Supply Dearth Stall Housing Momentum?
The Fed raised rates in March and currently forecasts two more increases this year. The federal government’s actions related to economic stimulus, taxation and borrowing limits could affect consumer confidence and spending levels, which, in turn, could hurt both the economy and the housing market.
That said, mortgage buyer Freddie Mac said on May 10 that the average rate on 30-year, fixed-rate mortgages was 4.55%, unchanged from last week. This is expected to encourage potential homebuyers during the seasonally busy spring buying season.
However, we cannot ignore the fact that rising mortgage rates and high prices of homes from inventory squeeze are indeed creating hurdles for buyers (mostly first-time buyers). Nonetheless, robust demand from a solid economy and a cheerful job market is keeping the industry alive.
Has Spring Sprung Gains?
As we are at the start of the key spring selling season, investors should be overwhelmed with existing and new U.S. home sales data for March. Despite persistently low inventories and a shoot-up in price, both rose and beat market expectations.
Existing home sales in the United States rose 1.1% on a monthly basis to a seasonally adjusted annual rate of 5.6 million in March 2018. It breezed past market expectations of a 0.2% rise to 5.54 million. Meanwhile, sales of new single-family houses, which make up about 10% of all U.S. home sales rose 4% from the earlier month to a seasonally adjusted annual rate of 694 thousand, marking a four-month high and beating market consensus of 625 thousand.
Hence, the picture seems to be quite rosy depicting the fact that despite higher borrowing costs and home prices, demand for home purchases has grown in the spring buying season as the economic outlook has improved and strengthened consumer confidence.
Stocks to Buy
The positive momentum that the housing industry has been experiencing is evident from the improvement in its Zacks Rank. The Zacks Homebuilding Industry has outperformed the broader market (S&P 500) in the past year. The industry has gained 16.1% compared with the S&P 500 index’s 12.9% rally. Notably, homebuilding ranks among the top 11% of all Zacks industries. Along with an impressive past performance of the industry, a favorable rank indicates that companies in this space are likely to benefit from positive factors.
So, let’s take a look at five stocks that delivered a positive earnings surprise in the first quarter and are witnessing upward revisions in earnings estimates for 2018 or 2019. All these companies have either a Zacks Rank #1 (Strong Buy) or 2 (Buy).
William Lyon Homes (NYSE:WLH) reported better-than-expected results for the first quarter of 2018. In addition to delivering a positive earnings surprise of 42.11%, the company’s earnings surged 145.5% in first-quarter 2018 from the year-ago level with expansion of 260 basis points (bps) in the adjusted homebuilding gross margin.
A solid backlog and a favorable market environment bode well for this Zacks Rank #1 stock. Although earnings estimates for 2018 have remained unchanged over the past 60 days, the same has moved 6.1% up for 2019. Estimated earnings growth is 43.4% for the current year and 20.4% for 2019.
M.D.C. Holdings, Inc. (NYSE:MDC) has a decent track of positive earnings surprise, beating expectations in three of the last four quarters, with an average surprise of 31.45%. The company’s first-quarter earnings of 68 cents per share grew 70% and homebuilding revenues rose 7.8%. Meanwhile, the Zacks Consensus Estimate for 2018 and 2019 earnings has moved north by 10.7% and 9.7%, respectively, over the past 30 days. This Zacks Rank #1 stock has expected earnings growth rate of 27.9% for 2018 and 13.2% for 2019.
Beazer Homes USA, Inc. (NYSE:BZH), a Zacks Rank #2 stock, has surpassed earnings expectations in each of the last four quarters, with an average positive surprise of 177.21%. Earnings estimates for the current quarter and 2019 have moved north by 7.9% and 5.6%, respectively, over the past 30 days. The Zacks Consensus Estimate projects EPS growth of 78.3% for the current quarter.
Century Communities Inc (NYSE:CCS), also a Zacks rank #2 stock, has a solid earnings track, having surpassed expectations in three of the last four quarters, with an average surprise of 46.36%. 2018 earnings estimates moved up 1.4% over the past 30 days, while remained stable for 2019. Estimated earnings growth is 30.7% for the current year and 19.9% for 2019.
Meritage Homes Corp (NYSE:MTH) has also surpassed earnings expectations in each of the last four quarters with an average surprise of 23.04%. Earnings estimates have moved 6.3% higher for 2018 and 1.2% for 2019, over the past 30 days. The company has expected earnings growth rate of 38.7% for 2018 and 8.1% for 2019.
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