By Philip van Doorn, MarketWatch
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:
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 /zigman2/quotes/210599714/realtime SPX -0.22% , the S&P Mid-Cap 400 Index /zigman2/quotes/210599897/delayed MID -0.35% and the S&P 600 Small-Cap Index /zigman2/quotes/210599868/delayed SML -0.53% .)
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.
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.||/zigman2/quotes/206244792/composite CVCO||66%||53%||263%||338%|
|M.D.C. Holdings Inc.||/zigman2/quotes/203145113/composite MDC||-2%||39%||39%||35%|
|D.R. Horton Inc.||/zigman2/quotes/202032328/composite DHI||-15%||89%||45%||124%|
|Meritage Homes Corp.||/zigman2/quotes/209069331/composite MTH||-18%||47%||10%||-3%|
|KB Home||/zigman2/quotes/206220859/composite KBH||-21%||103%||77%||44%|
|PulteGroup Inc.||/zigman2/quotes/202924304/composite PH||-21%||83%||36%||62%|
|Lennar Corp. Class A||/zigman2/quotes/202536373/composite LEN||-23%||50%||-1%||39%|
|TRI Pointe Group Inc.||/zigman2/quotes/204302452/composite TPH||-25%||56%||-5%||-7%|
|Toll Brothers Inc.||/zigman2/quotes/201912487/composite TOL||-26%||56%||-1%||8%|
|M/I Homes Inc.||/zigman2/quotes/200736509/composite MHO||-27%||37%||-1%||21%|
|NVR Inc.||/zigman2/quotes/209548385/composite NVR||-27%||110%||61%||173%|
|LGI Homes Inc.||/zigman2/quotes/202461766/composite LGIH||-33%||161%||75%||N/A|
|William Lyon Homes Class A||/zigman2/quotes/208078919/composite WLH||-42%||53%||-26%||-17%|
|S&P 1500 homebuilding subsector||-21%||76%||29%||65%|
|S&P Composite 1500 Index||11%||21%||60%||90%|
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||/zigman2/quotes/202536373/composite LEN||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%|
|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%|
|M.D.C. Holdings Inc.||MDC||16%||15%||18%||7%||6%|
|Meritage Homes Corp.||MTH||9%||14%||11%||4%||6%|
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 /zigman2/quotes/202536373/composite LEN +0.20% 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 /zigman2/quotes/202461766/composite LGIH +0.69% .
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|
|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|
|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|
Again, the P/E ratios are based on consensus earnings estimates for the next 12 months.
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