By Philip van Doorn
Homebuilders in the U.S. are entering what may be the best of times. Demand is strong, and mortgage rates are near record lows. And their stocks are trading at low valuations to expected earnings — they even got cheaper over the past three weeks.
On April 13, we looked at U.S. homebuilders and related stocks , and pointed out how low price-to-earnings ratios were and how high growth estimates for the group were. In this update, we’re looking only at the homebuilders, and remarkable recent developments.
First, take a look at the homebuilders as a group — there are 15 of them in the S&P Composite 1500 Index /zigman2/quotes/210600453/delayed XX:SP1500 -0.60% (which itself is made up of the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.51% , the S&P 400 Mid Cap Index /zigman2/quotes/219506813/composite MID +0.09% and the S&P Small Cap 600 Index /zigman2/quotes/210599868/delayed SML -1.98% ).
Here’s a five-year chart showing rolling forward price-to-earnings ratios for the S&P 1500 homebuilders industry group and the full S&P Composite 1500:
The forward P/E ratios in the chart are weighted by market capitalization and based on consensus estimates among Wall Street analysts polled by FactSet.
It’s customary for the homebuilders to trade at lower P/E valuations than the index. But they are much cheaper than usual on this basis. As of the close on April 30, the homebuilders industry group traded at a weighted forward P/E of 9.4, which was 44% of the S&P Composite 1500’s weighted forward P/E of 21.6. But over the past five years, the builders have traded at an average forward P/E of 10.8, which has been 60% of the index’s five-year average forward P/E of 18.1.
In the previous look at the homebuilders, based on April 12 data, we showed that 14 of the 15 builders were expected to increase sales by double digits in 2021 and that seven were expected to do so in 2022.
For most of the homebuilders, sales-growth estimates have increased considerably since April 12, while earnings estimates have risen even more, which has driven a decline in forward P/E ratios.
First, here’s how much analysts expect sales for the group to increase in 2021 and 2022:
The data is for calendar years, as some companies have fiscal years that don’t match calendar years or even calendar quarters. For this reason, the 2020 column is analysts’ estimates for the calendar year.
The homebuilders on all the tables are sorted by market capitalization.
Among the five largest builders, PulteGroup Inc. /zigman2/quotes/201694804/composite PHM +0.14% is expected to show the largest increase in revenue this year, while D.R. Horton Inc. /zigman2/quotes/202032328/composite DHI -1.05% and Toll Brothers Inc. /zigman2/quotes/201912487/composite TOL -1.54% are expected to be the only ones continuing with double-digit increases in sales in 2022.
Now here’s how much those sales estimates increased between April 13 and April 30: