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Homebuilding Industry Outlook: Near-Term Prospects Bleak

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The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some of the industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agency and closing services.

Let’s take a look at the industry’s three major themes:

  • Improving economic conditions, rising disposable income and favorable demographic changes are continuing to support demand. The U.S. economy is clearly on a solid footing given impressive labor market, low unemployment rate, rising wages and modest inflation. This is expected to boost housing activity and provide the basis for stronger demand in the near term. Meanwhile, the U.S. Federal Reserve’s dovish monetary stance is certainly a boon for the rate-sensitive housing market.
     
  • Raw material prices — which have been increasing double-digits over the past few months due to the initial effects of tariffs on items like steel, aluminum and softwood lumber — are now rising low-single digits. This should provide a meaningful boost to margins in the near term.
     
  • However, the operating backdrop has been tough for the U.S. homebuilding space since the second half of 2018, thanks to rising mortgage rates, higher construction costs, shortage of skilled labor and a dearth of buildable lots. Lower supply of homes has pushed home prices higher in several parts of the country. This, along with rising mortgage rates, is making houses less affordable for buyers (mostly the first time ones). Meanwhile, homebuilders continue to be apprehensive about the industry’s prospects considering rising land, labor and transportation costs.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Building Products - Home Builders industry is a 17-stock group within the broader Zacks Construction Sector. The industry currently carries a Zacks Industry Rank #241, which places it at the bottom 5% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dismal near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 5% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since October 2018, the industry’s earnings estimates for 2019 have gone down approximately 19.6%.

Despite the industry’s dull near-term prospects, we will present a few homebuilding stocks that one can hold on to. But it’s worth taking a look at the industry’s shareholder return and current valuation first.

Industry Lags on Stock Market Performance

The Zacks Building Products - Home Builders industry has lagged the broader Zacks Construction Sector as well as the S&P 500 index over the past year.

Over this period, the industry has declined 17% versus the broader sector’s decline of 14% and the S&P 500 Index gain of 4.3%.

One-Year Price Performance





Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 9.4X compared with the S&P 500’s 16.8X and the sector’s 13.1X.

Over the last five years, the industry has traded as high as 15.2X, as low as 6.9X, with the median at 11.5X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500



 

Bottom Line

The recent softening of home price appreciation, historically low mortgage rates and Fed’s dovish stance should give a boost to the spring homebuying season. However, rates are higher compared with the year-ago period that might affect demand. Meanwhile, concerns surrounding limited supply and higher material, freight and labor costs have been eating into builders’ margins over the past several quarters.

Currently, there is only one top-ranked stock in the Zacks Building Products - Home Builders industry that is cashing in on the positive industry fundamentals.

Loma Negra Compañía Industrial Argentina Sociedad Anónima (LOMA - Free Report) : Based in Buenos Aires, Argentina, this company manufactures and markets cement and its by-products in Argentina and Paraguay. The stock carries a Zacks Rank #2 (Buy) and the Zacks Consensus Estimate for its 2019 earnings has gone up 17.4% over the past 60 days.

Price and Consensus: LOMA

 

 

Investors may hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid earnings growth prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lennar Corporation (LEN - Free Report) : This Miami, FL-based homebuilding company has an estimated long-term EPS growth rate of 14%. It came up with an average positive surprise of 73% in the trailing four quarters.

Price and Consensus: LEN

 



NVR, Inc. (NVR - Free Report) : This Reston, VA-based homebuilder has an estimated long-term earnings growth rate of 10%. It has an average positive earnings surprise of 13.4% for the trailing four quarters.

Price and Consensus: NVR


Meritage Homes Corporation (MTH - Free Report) : This Scottsdale, AZ-based company designs and builds single-family homes in the United States. The stock has an estimated long-term earnings growth rate of 9.6%. It has an average positive earnings surprise of 21.8% for the trailing four quarters.

Price and Consensus: MTH

 



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