The homebuilding industry is positioned for solid growth due to strong demand for residential properties. The potential interest rate cuts next year, poised to stimulate housing demand, make it prudent to consider investing in fundamentally strong homebuilder stocks Taylor Morrison Home Corporation (TMHC), Hovnanian Enterprises, Inc. (HOV), and M/I Homes, Inc. (MHO).
Before delving deeper into their fundamentals, let’s discuss why the homebuilder industry is well-positioned for growth.
The homebuilder industry’s prospects are shaped by factors such as population growth, rapid urbanization, rising disposable income, and government initiatives promoting affordable housing. The U.S. homebuilder market is anticipated to grow at a CAGR of 4.7% to reach $142.90 trillion by 2028.
According to the U.S. Census Bureau, new single-family home sales in November 2023 were 1.4% higher than in the same period in 2022, with an average sales price of $488,900. The global real estate market is forecasted to grow at a CAGR of 4.14% to reach $9.76 trillion by 2030.
Meanwhile, the heeding concerns and lowering mortgage rates could stimulate home buying, boosting demand in the housing market and benefiting the homebuilding industry. The global residential construction market is expected to grow at a 4.8% CAGR to $8.31 billion by 2032.
Furthermore, the housing market is rapidly integrating smart home technologies like automation, energy management, and interconnected devices, enhancing convenience, comfort, and energy efficiency for an improved living experience.
Considering these conducive trends, let’s analyze the fundamentals of the three Homebuilders stock picks, beginning with the third choice.
Stock #3: Taylor Morrison Home Corporation (TMHC)
TMHC and its subsidiaries operate as public homebuilders in the United States. The company designs, builds, and sells single and multi-family detached and attached homes and develops lifestyle and master-planned communities.
On November 29, 2023, TMHC announced its 2024 design trends, including five home aesthetics, a paint color palette, strategies for bringing the outdoors inside, collaboration with The Home Edit, and an emphasis on inclusivity with cultural design principles, showcasing a response to evolving homebuyers' preferences.
In terms of the trailing-12-month net income margin, TMHC’s 11.05% is 146.6% higher than the 4.48% industry average. Its 15.71% trailing-12-month EBIT margin is 109% higher than the 7.52% industry average. Likewise, the stock’s 10.33% trailing-12-month Return on Total Assets is 158.6% higher than the 4% industry average.
For the fiscal third quarter that ended September 30, 2023, TMHC’s total revenues stood at $1.68 billion. The company’s adjusted net income and adjusted earnings per common share came in at $179.69 million and $1.62, respectively. Its adjusted EBITDA stood at $275.49 million.
Also, as of September 30, 2023, TMHC’s total liabilities came in at $3.26 billion compared to $3.82 billion as of December 31, 2022.
TMHC surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 81.5% to close the last trading session at $53.91.
TMHC’s strong prospects are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Value and Sentiment. It is ranked #7 out of 24 stocks in the B-rated Homebuilders industry. Click here to see TMHC’s Growth, Stability, and Quality ratings.
Stock #2: Hovnanian Enterprises, Inc. (HOV)
HOV and its subsidiaries design, construct, market, and sell residential homes in the United States. They offer single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes with amenities such as clubhouses, swimming pools, tennis courts, tot lots, and open areas.
In terms of the trailing-12-month EBIT margin, HOV’s 9.98% is 32.7% higher than the 7.52% industry average. Its 10.77% trailing-12-month levered FCF margin is 105% higher than the 5.25% industry average. Likewise, the stock’s 1.09x trailing-12-month asset turnover ratio is 9.7% higher than the 0.99x industry average.
HOV’s net sales for the fiscal fourth quarter that ended October 31, 2023, increased marginally year-over-year to $887.03 million. The company’s net income available to common stockholders and net income per common share rose 78.6% and 80.2% over the prior-year quarter to $94.60 million and $13.05, respectively. Additionally, its adjusted EBITDA came in at $181.22 million, up 25.5% year-over-year.
HOV’s stock has gained 274.8% year-to-date to close the last trading session at $157.71.
HOV’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Value and Momentum and a B for Growth. Within the same industry, it is ranked #6. To see HOV’s Stability, Sentiment, and Quality ratings, click here.
Stock #1: M/I Homes, Inc. (MHO)
MHO and its subsidiaries operate as builders of single-family homes in Ohio, Indiana, Illinois, Minnesota, Michigan, Florida, Texas, North Carolina, and Tennessee. The company operates through the Northern Homebuilding, Southern Homebuilding, and Financial Services segments.
On November 15, 2023, MHO announced a $100 million increase to its share repurchase authorization, approved by the Board of Directors. The common shares can be repurchased through various methods, and the timing and amount will be determined at the company's discretion, with no expiration date for the authorization.
In terms of the trailing-12-month EBITDA margin, MHO’s 15.08% is 38.2% higher than the 10.91% industry average. Likewise, its 22.48% trailing-12-month Return on Common Equity is 97.1% higher than the industry average of 11.40%. Furthermore, the stock’s 11.47% trailing-12-month net income margin is 156% higher than the industry average of 4.48%.
For the third quarter ended September 30, 2023, MHO’s total revenues increased 3.3% year-over-year to $1.05 million. Its operating income rose 2.9% over the prior-year quarter to $172.13 million. In addition, the company’s net income and EPS stood at $139.02 million and $4.82, up 5.6% and 3.2% year-over-year, respectively.
For the quarter ending March 31, 2024, MHO’s revenue is expected to increase 1.8% year-over-year to $1.02 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 209.5% to close the last trading session at $138.86.
It’s no surprise that MHO has an overall rating of B, which translates to a Buy in our proprietary POWR Ratings system.
It has an A grade for Momentum and a B for Value and Quality. It is ranked #2 in the Homebuilders industry. In total, we rate MHO on eight different levels. Beyond what we stated above, we also have given MHO grades for Growth, Stability, and Sentiment. Get all the MHO ratings here.
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TMHC shares were unchanged in premarket trading Friday. Year-to-date, TMHC has gained 77.63%, versus a 26.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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