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Homebuilding Continues to Drive Construction Spending: 4 Picks

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Spending on construction projects continued to rise in December, making it a great 2021 for the sector. The improvement came despite fears of Omicron and rising costs that slowed down spending.

Since the economy started reopening, the homebuilding industry has been helping the construction sector. Building of new single-family homes has been on the rise on higher demand. December too wasn’t any different.

Against this backdrop, stocks like Toll Brothers (TOL - Free Report) , KB Home (KBH - Free Report) , PulteGroup (PHM - Free Report) and Lennar Corporation (LEN - Free Report) are likely to benefit.

Construction Activity Rises Again

On Jan 3, the Commerce Department reported that construction spending rose 0.2% in December to a seasonally adjusted annual rate of $1,639.9 billion, up from a revised estimate of $1,636.5 billion in November.

Year over year, construction spending increased 9% in December. For the whole year of 2021, spending on construction projects rose 8.2%, from $1,469.2 billion spent in 2020.

Spending on private projects rose by 0.7%, while spending on residential buildings jumped 1.1%. Single-family homebuilding purchases increased 2.1%. Spending on public construction projects, on the other hand, fell by 1.6%, acting as the dampener.

Homebuilding Market on a High

Since the economy reopened from the coronavirus-induced lockdown in June 2020, the homebuilding market has been on a firm footing. Despite rising labor and raw material costs, demand for single-family houses has been on the rise.

Following the spread of coronavirus, millions of people started looking for new single-family houses in less-populated locations to prevent contracting the virus. This pushed up demand and resulted in the homebuilding industry becoming a primary driver of overall construction spending in the United States for more than a year.

Although the pace of growth somewhat slowed down in December after a 0.6% rise in spending in November, it was an overall great year for the construction sector. Spending picked up as the economy continued to grow.

The Commerce Department announced on Jan 26 that new home sales jumped 11.9% on a month-over-month basis. New home sales came in at 811,000 units at a seasonally adjusted annual rate compared to November’s revised rate of 725,000. Also, new home sales reached a 10-month high in December.

Our Choices

Homebuilding continues to be a bright spot in the overall construction activity. Private residential construction spending picked up to cater to the escalating demand for new homes, thus making for the right opportunity to invest in homebuilding stocks.

Toll Brothers Inc. builds single-family detached and attached home communities; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities, principally on the land it develops and improves. TOL operates in Arizona, California, Florida, Delaware, Maryland, Pennsylvania and South Carolina. Toll Brothers offers homes under two segments, namely Traditional Home Building Product and City Living.

Toll Brothers’ expected earnings growth rate for the current year is 49.9%. The Zacks Consensus Estimate for current-year earnings improved 12.6% over the past 60 days.  Toll Brothers has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home is a well-known homebuilder in the United States and one of the largest in the state. KB Homes’ revenues are generated from Homebuilding (accounting for 99.7% of fiscal 2021 total revenues) and Financial Services (0.3%) operations. KBH’s homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, town homes and condominiums.

KB Home’s expected earnings growth rate for the current year is 67.9%. The Zacks Consensus Estimate for current-year earnings has improved 28.9% over the past 60 days. KB Home sports a Zacks Rank #1.

Lennar Corporation is engaged in homebuilding and financial services in the United States. LEN’s reportable segments consist of Homebuilding, Lennar Financial Services, Rialto and Lennar Multifamily. Despite the varied product portfolio, homebuilding remains Lennar’s core business.

Lennar Corporation’s expected earnings growth rate for the current year is 10.9%. The Zacks Consensus Estimate for current-year earnings improved 4% over the past 60 days. Shares of LEN have gained 23.2% in the past three months. Lennar carries a Zacks Rank #2 (Buy).

PulteGroup engages in homebuilding and financial services businesses, primarily in the United States. PHM conducts operations through two primary business segments — Homebuilding and Financial Services. PulteGroup has been gaining on solid demand trends and higher pricing. Both home sales gross and operating margins were up 200 basis points (bps) year over year in the third quarter. 

PulteGroup’s expected earnings growth rate for the current year is 37.5%. Shares of PHM have gained 9.3% in the past three months. PulteGroup carries a Zacks Rank #2.

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Lennar Corporation (LEN) - free report >>

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