Shares of most homebuilders have taken it on the chin this year, despite the housing shortage in so many parts of the U.S. But valuations for the group are very low, and several homebuilders are expected to show double-digit earnings increases in 2019 and 2020.
It’s easier to understand the decline if you look at a five-year chart of the S&P 1500 homebuilding subsector:
FactSet
There are 13 stocks in the S&P 1500 homebuilding subsector. (The S&P 1500 Composite Index is made up of the S&P 500 Index SPX, +0.00% the S&P Mid-Cap 400 Index MID, +0.34% and the S&P 600 Small-Cap Index SML, +0.41% )
The homebuilders as a group had an incredible total return of 76% in 2017, so maybe it should not be much of a surprise that the group is down 21% this year through Sept. 25.
Now the question is whether investors are looking at an opportunity to scoop up shares of homebuilders at cheaper prices. The massive cut in federal corporate income tax rates is expected to help lead to a 44% increase in weighted earnings per share this year for the S&P 1500 homebuilding subsector, based on consensus estimates among analysts polled by FactSet. Analysts expect the group’s earnings to increase by 18% in 2019.
Meanwhile, the combination of a decline in share prices for most of the homebuilders and the spike in earnings has driven valuations lower. The forward price-to-earnings (P/E) ratio for the homebuilders, based on weighted earnings estimates for the next 12 months, is 8.7. That is down from 12.5 a year earlier — well before the tax cuts were signed into law by President Trump. In comparison, the S&P Composite 1500 Index trades at a forward P/E of 16.9, down from 17.7 a year earlier.
There are signs that the U.S. housing market is nearing a tipping point. Home-price increases have decelerated, according to the latest S&P CoreLogic Case-Shiller data.
A considerable drop in demand for housing would, of course, hurt homebuilders. But for now, prices are still rising, and new-home sales are increasing at a good clip, while data for housing starts and building permits are mixed.
If you believe that the U.S. economy will continue on its growth course for several more years, this could be a good entry point for homebuilder stocks.
Data
Here’s how the 13 stocks in the S&P 1500 homebuilding subsector have performed, sorted by how well they have done this year:
Ticker Total return - 2018 through Sept. 25 Total return - 2017 Total return - 3 years Total return - 5 years Cavco Industries Inc. CVCO, +0.46% 66% 53% 263% 338% M.D.C. Holdings Inc. MDC, +0.24% -2% 39% 39% 35% D.R. Horton Inc. DHI, +0.84% -15% 89% 45% 124% Meritage Homes Corp. MTH, -0.99% -18% 47% 10% -3% KB Home KBH, +0.29% -21% 103% 77% 44% PulteGroup Inc. PH, -1.38% -21% 83% 36% 62% Lennar Corp. Class A LEN, -0.83% -23% 50% -1% 39% TRI Pointe Group Inc. TPH, -1.67% -25% 56% -5% -7% Toll Brothers Inc. TOL, -1.55% -26% 56% -1% 8% M/I Homes Inc. MHO, -0.95% -27% 37% -1% 21% NVR Inc. NVR, -2.85% -27% 110% 61% 173% LGI Homes Inc. LGIH, -1.98% -33% 161% 75% N/A William Lyon Homes Class A WLH, -1.00% -42% 53% -26% -17% S&P 1500 homebuilding subsector -21% 76% 29% 65% S&P Composite 1500 Index 11% 21% 60% 90% Source: FactSet
For three years, only four of the homebuilders have had total returns exceeding that of the S&P 1500 Composite Index. For five years, only three have beaten the index.
Here are sales growth numbers and projections, with the list sorted by increases in quarterly sales for the most recently reported periods:
Ticker Increase in sales - most recent reported quarter from year earlier Increase in sales per share - most recent reported quarter from year earlier Expected sales increase - 2018 Expected sales increase - 2019 Expected sales increase - 2020 Lennar Corp. Class A LEN, -0.83% 67% 19% 64% 14% 3% TRI Pointe Group Inc. TPH 35% 38% 15% 5% 9% LGI Homes Inc. LGIH 30% 20% 23% 23% 26% Toll Brothers Inc. TOL 27% 43% 21% 12% 3% PulteGroup Inc. PHM 27% 34% 18% 7% 11% William Lyon Homes Class A WLH 23% 19% 26% 8% 20% M/I Homes Inc. MHO 22% 29% 16% 7% N/A Cavco Industries Inc. CVCO 19% 18% 10% 9% 9% D.R. Horton Inc. DHI 17% 16% 16% 12% 7% NVR Inc. NVR 16% 17% 15% 7% 2% M.D.C. Holdings Inc. MDC 16% 15% 18% 7% 6% Meritage Homes Corp. MTH 9% 14% 11% 4% 6% KB Home KBH 7% 5% 6% 8% 10% Source: FactSet
We have also included increases in quarterly sales per share, because this reflects dilution to the share count caused by the issuance of shares for any reason, as well as the boost from net share buybacks. Lennar LEN, -0.83% issued a large amount of new shares when it acquired CalAtlantic in February, so the per-share figure is more useful and the projected sales growth number for 2018 is distorted.
Looking out to 2019 and 2020, the only company expected by analysts to post double-digit increases in revenue for both years is LGI Homes LGIH, -1.98%
Rather than compare earnings results from a year earlier (because any quarter’s earnings numbers can be skewed by one-time events or accounting adjustments), here are earnings-per-share projections based on analysts’ projections and a comparison of forward price-to-earnings ratios from a year ago. The list this time is sorted by projected EPS growth in 2019:
Ticker Projected change in EPS - 2018 Projected EPS increase - 2019 Projected EPS increase - 2020 P/E P/E - one year ago KB Home KBH -7.1% 84.3% 15.0% 8.4 11.3 Lennar Corp. Class A LEN 43.7% 43.0% 5.7% 8.2 11.1 William Lyon Homes Class A WLH 123.8% 19.7% 32.3% 5.8 8.7 LGI Homes Inc. LGIH 36.4% 19.4% 20.9% 7.3 10.1 D.R. Horton Inc. DHI 43.3% 18.5% 4.8% 9.5 12.6 Cavco Industries Inc. CVCO 12.4% 15.0% 17.0% 36.7 29.3 Toll Brothers Inc. TOL 45.5% 11.1% 4.9% 7.1 12.1 M/I Homes Inc. MHO 67.7% 9.7% N/A 6.1 8.2 NVR Inc. NVR 55.2% 9.0% -0.2% 12.6 20.0 TRI Pointe Group Inc. TPH 50.5% 7.1% 11.4% 7.6 8.7 Meritage Homes Corp. MTH 65.5% 4.9% 6.1% 7.5 10.5 M.D.C. Holdings Inc. MDC 52.6% 3.8% 3.2% 8.1 12.7 PulteGroup Inc. PHM 158.3% 3.6% 11.6% 7.1 10.6 Source: FactSet
Again, the P/E ratios are based on consensus earnings estimates for the next 12 months.
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