Value investors searching for industrial goods stocks should look no further than the residential construction sector. Real estate has enjoyed years of robust price growth in several markets across the country. However, labor shortages, rising interest rates and higher real estate prices have slowed the growth of this sector, making many homebuilder stocks a bargain.
Most homebuilder stocks now see forward price-to-earnings (P/E) ratios in the single-digits. And slowing growth does not wholly explain this as many support price-to-earnings-to-growth (PEG) ratios under 0.5.
For investors willing to take a chance on what many see as a slowing industry, they can buy high levels of profit growth at a low multiple in these 3 homebuilding stocks:
Homebuilder Stocks for Value Investors: PulteGroup (PHM)
PulteGroup (NYSE:PHM) builds mostly single-family homes in 49 different markets across the United States. Pulte currently ranks as the 3rd largest homebuilder in the country.
PHM stock has become a case where the stock price fails to keep up with profit growth. Assuming the consensus annual earnings estimate of $3.75 hold, the forward P/E will fall to about 7.5. This stands as an unusually low P/E for a stock expecting to see an average of 44.2% annual profit growth over the next five years. A predicted 2.9% growth rate next year may have brought about the low P/E.
Still, PHM stock has seen an average P/E of 12.6 over the last five years. While that may not reach as high as the 25.2 PE of the S&P 500, it means the stock would have to rise by at least 70% simply to regain its average valuation. Given the forecasted growth over the next few years, PHM’s single-digit P/E appears to be an overreaction.
Also, the stock has shown a lot of movement in recent years. Between early 2016 and late 2017, PHM stock went from below $15 to a high of $35.21. It has since fallen back to about $28 per share and has remained range-bound since February.
Still, despite rising rates, interest remains low by historical standards. Moreover, the labor shortage in this industry should lead to these types of industrial goods stocks rising as homebuilders play catch-up. Given these dynamics, PHM stock creates a chance to buy low and if not sell high, at least to earn substantial returns.
Homebuilder Stocks for Value Investors: Century Communities (CCS)
Century Communities (NYSE:CCS) stands out among homebuilder stocks as a relatively new entrant to the market. Based in Greenwood Village, Colorado, the company has focused exclusively on single family homes since its founding in 2002. It operates in 12 states across the West and South.
Since its IPO in June 2014, CCS stock has moved higher very slowly. The stock launched at a share price of $23 per share, and CCS now trades at about $29 per share. Like many homebuilders, it has fallen more than 20% from its 52-week high.
Analysts forecast earnings of $3.70 per share for the current fiscal year. If that figure holds, it would bring the forward P/E to about 7.8. While this remains inexpensive, a relatively small size magnifies this bargain. With a market cap of around $872 million, the company has plenty of room to grow.
Century has undoubtedly produced substantial rates of revenue increase. CCS stock saw 28.1% annual growth on average over the last five years. Over the next five, analysts predict that rate will rise to an average of 34%. This year, they see growth coming in at 82%!
While CCS stock trades well below its average P/E, investors should consider risks. One risk unique to CCS stock is a significant buildup in inventory. This has become particularly acute as it has risen from about $927 million to almost $1.7 billion over the last year. Should a major disruption occur in the housing market, this inventory buildup could bring pain to CCS stock.
However, at 7.8 times future earnings, one has to assume that the stock already has much of that risk priced in. So if it can firmly maintain its growth rate, CCS should enjoy a bright future.
Homebuilder Stocks for Value Investors: Meritage Homes (MTH)
Meritage (NYSE:MTH), like many homebuilder stocks, specializes in single-family homes. However, the Scottsdale, Arizona based construction company also builds active adult housing communities geared toward the fast-growing 55+ population. It also constructs luxury homes in both its home state of Arizona and in Texas.
Meritage stocked peaked more quickly than many of its peers, hitting its 52-week high last December instead of in January like most homebuilders. The stock has fallen by almost 23% from this high and currently trades at about $44.
MTH stock is catching up to its peers regarding growth, however. Mired in single-digit growth rates for years, analysts expect 46.6% profit growth for this year. They also forecast average annual growth at 20.8% per year for the next five years.
As a result, the forward P/E of MTH stock has fallen to 7.5 on a projected net income of $5.66 per share. The stock has traded at an average 11.5 multiple over the last five years.
A sticking point involves the history of MTH stock, however. Unfortunately for current investors, the stock has found itself stuck in a range over the last five years. Stagnant profit growth and the lack of a dividend have given investors little incentive to buy.
Fortunately for new investors, the return of double-digit profits could change this. Moreover, the P/E ratio in the 7.5 has become low, even by standards of the homebuilding industry. Barring any significant disruption to the industry, these two factors should combine to bring MTH stock a long overdue increase in its stock price.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.