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7 Construction Stocks to Buy on Favorable Housing Trend
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U.S. homebuilders are rejoicing the favorable market conditions since April 2023, as visible in most companies’ earnings trend reversal lately. The positive turn can also be witnessed in the builder confidence level that rose five points to 50 in May from April, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This was the first time since July 2022, when sentiment levels reached the midpoint.
Market pundits noted that owing to the limited existing inventory, new construction is getting a boost and defying financial market challenges.
Apart from the prevailing industry headwinds, affordability was the most important issue. The same did not allow buyers to indulge in home-buying activity. Nominal wage gains, lower mortgage rates and declining home prices boosted housing affordability in the first quarter of 2023. Per the recent NAHB/Wells Fargo Housing Opportunity Index (HOI), 45.6% of new and existing homes sold in the first quarter were affordable to families earning the U.S. median income of $96,300. This was higher than fourth-quarter 2022 levels, where only 38.1% homes were affordable.
Another important factor that limited homebuilders to build more was lack of buildable lot. The recent HMI survey also revealed that a total of 67% of builders reported some type of shortage versus 76% in September 2021.
On another positive note, private residential construction spending grew for the first time since June 2022 to 0.5% in April compared with March 2023 levels.
Demand for new homes, which is improving in lower-density markets, effective cost control and higher operating leverage are also helping industry players to offset challenges like higher inflationary pressure, tight labor and tightening credit conditions on construction loans. These positives are benefiting the Zacks Building Products - Home Builders industry and its supportive building materials and other industries.
Companies like Toll Brothers, Inc. (TOL - Free Report) , PulteGroup Inc. (PHM - Free Report) , M.D.C. Holdings, Inc. , Owens Corning (OC - Free Report) , PGT Innovations, Inc. , Comfort Systems USA, Inc. (FIX - Free Report) and LSI Industries Inc. (LYTS - Free Report) have been gaining from their fundamental strength and the abovementioned tailwinds. While TOL, PHM, MDC, OC, PGTI and FIX currently sport a Zacks Rank #1 (Strong Buy), LYTS carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
A Look at the Listed Companies’ Historical Performance & Prospect
Toll Brothers: Based in Horsham, PA, this leading builder of luxury homes gained 28.6% in the past three months, outperforming the industry’s 19.7% rise. In second-quarter fiscal 2023 (ended Apr 30, 2023), the top and the bottom line beat the Zacks Consensus Estimate. It also delivered strong earnings and improved gross margin, despite the ongoing challenges in the industry. TOL also lifted its guidance for fiscal 2023.
Earnings estimates for fiscal 2023 have increased to $10.36 per share from $10.08 per share in the past seven days. TOL’s earnings topped the Zacks Consensus Estimate in all of the trailing four quarters, the average being 24.4%. Again, it carries an impressive VGM Score of A. This helps identify stocks with the most attractive value, growth and momentum.
PulteGroup: Based in Atlanta, GA, this leading homebuilder rallied 32.9% in the past three months. Its first-quarter 2023 earnings and revenues surpassed the respective Zacks Consensus Estimate and increased year over year. The company witnessed solid gross orders, closings and margins and posted a 28% increase in earnings per share (EPS) and a 12-month return on equity of 32%.
The Zacks Consensus Estimate for PHM's 2023 earnings has been revised upward to $9.13 per share from $9.05 in the past 30 days. Its earnings topped consensus estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 15.6%. Again, it carries an impressive VGM Score of A.
M.D.C. Holdings: This U.S. based homebuilding and financial services company gained 25.3% in the past three months. In first-quarter 2023, earnings surpassed the Zacks Consensus Estimate. Revenues also beat the same, backed by improving mortgage rates and a low unemployment rate. MDC expects an increasing community count to help drive volume in 2023.
Earnings estimates for MDC’s 2023 have increased to $3.39 per share from $3.23 in the past 30 days. The company’s earnings surpassed the Zacks Consensus Estimate in two of the trailing four quarters and missed on other two occasions, the average surprise being 27.8%. Impressively, it carries a VGM Score of A.
Owens Corning: The world leader in building material systems and composite solutions increased 29.7% in the past three months. Its first-quarter 2023 earnings and net sales surpassed the Zacks Consensus Estimate as all the segments performed well relative to market conditions, especially the North American residential businesses.
The Zacks Consensus Estimate for OC’s 2023 earnings has been upwardly revised to $10.52 per share from $10.42 in the past week. Its earnings topped consensus estimates in the trailing four quarters, with the average surprise being 15.1%. Also, it holds a VGM Score of B.
PGT Innovations: North Venice, Florida-based PGTI gained 30% in the past three months. Its first-quarter 2023 earnings surpassed the Zacks Consensus Estimate. The top and the bottom line increased from the year-ago period’s levels, owing to strong operational execution, solid pricing actions and cost-containment efforts.
The Zacks Consensus Estimate for PGTI’s 2023 earnings has been upwardly revised to $1.95 per share from $1.90 over the past week. Its earnings topped consensus estimates in three of the trailing four quarters and lagged on one occasion, with the average surprise being 19.1%. It holds a VGM Score of B.
Comfort Systems: This leading provider of commercial, industrial and institutional heating, ventilation, air conditioning (HVAC) and electrical contracting services rose 14.2% in the past three months. Its first-quarter 2023 earnings and net sales surpassed the Zacks Consensus Estimate and grew from the prior year’s levels. Backlog also increased in the quarter, reflecting ongoing demand strength in traditional and modular construction. Strong quarterly earnings were driven by solid segments and favorable resolution of certain litigation matters.
The Zacks Consensus Estimate for FIX’s 2023 earnings has been upwardly revised to $7.17 per share from $6.35 over the past two months. Its earnings topped consensus estimates in the trailing four quarters, with the average surprise being 20.2%. It has a VGM Score of B.
LSI Industries: This advanced lighting, graphics and display solutions provider fell 11.3% compared with the industry’s 21.6% decline in the past three months. Its third-quarter fiscal 2023 earnings and net sales surpassed the Zacks Consensus Estimate and improved year over year on continued demand strength within the Lighting segment, margin management and consistent operational execution.
The Zacks Consensus Estimate for LYTS’ 2023 earnings has been upwardly revised to 77 cents per share from 72 cents in the past 60 days. Its earnings topped consensus estimates in the trailing four quarters, with the average surprise being 60.4%. Importantly, it holds a VGM Score of A.
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7 Construction Stocks to Buy on Favorable Housing Trend
U.S. homebuilders are rejoicing the favorable market conditions since April 2023, as visible in most companies’ earnings trend reversal lately. The positive turn can also be witnessed in the builder confidence level that rose five points to 50 in May from April, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This was the first time since July 2022, when sentiment levels reached the midpoint.
Market pundits noted that owing to the limited existing inventory, new construction is getting a boost and defying financial market challenges.
Apart from the prevailing industry headwinds, affordability was the most important issue. The same did not allow buyers to indulge in home-buying activity. Nominal wage gains, lower mortgage rates and declining home prices boosted housing affordability in the first quarter of 2023. Per the recent NAHB/Wells Fargo Housing Opportunity Index (HOI), 45.6% of new and existing homes sold in the first quarter were affordable to families earning the U.S. median income of $96,300. This was higher than fourth-quarter 2022 levels, where only 38.1% homes were affordable.
Another important factor that limited homebuilders to build more was lack of buildable lot. The recent HMI survey also revealed that a total of 67% of builders reported some type of shortage versus 76% in September 2021.
On another positive note, private residential construction spending grew for the first time since June 2022 to 0.5% in April compared with March 2023 levels.
Demand for new homes, which is improving in lower-density markets, effective cost control and higher operating leverage are also helping industry players to offset challenges like higher inflationary pressure, tight labor and tightening credit conditions on construction loans. These positives are benefiting the Zacks Building Products - Home Builders industry and its supportive building materials and other industries.
Companies like Toll Brothers, Inc. (TOL - Free Report) , PulteGroup Inc. (PHM - Free Report) , M.D.C. Holdings, Inc. , Owens Corning (OC - Free Report) , PGT Innovations, Inc. , Comfort Systems USA, Inc. (FIX - Free Report) and LSI Industries Inc. (LYTS - Free Report) have been gaining from their fundamental strength and the abovementioned tailwinds. While TOL, PHM, MDC, OC, PGTI and FIX currently sport a Zacks Rank #1 (Strong Buy), LYTS carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
A Look at the Listed Companies’ Historical Performance & Prospect
Toll Brothers: Based in Horsham, PA, this leading builder of luxury homes gained 28.6% in the past three months, outperforming the industry’s 19.7% rise. In second-quarter fiscal 2023 (ended Apr 30, 2023), the top and the bottom line beat the Zacks Consensus Estimate. It also delivered strong earnings and improved gross margin, despite the ongoing challenges in the industry. TOL also lifted its guidance for fiscal 2023.
Earnings estimates for fiscal 2023 have increased to $10.36 per share from $10.08 per share in the past seven days. TOL’s earnings topped the Zacks Consensus Estimate in all of the trailing four quarters, the average being 24.4%. Again, it carries an impressive VGM Score of A. This helps identify stocks with the most attractive value, growth and momentum.
PulteGroup: Based in Atlanta, GA, this leading homebuilder rallied 32.9% in the past three months. Its first-quarter 2023 earnings and revenues surpassed the respective Zacks Consensus Estimate and increased year over year. The company witnessed solid gross orders, closings and margins and posted a 28% increase in earnings per share (EPS) and a 12-month return on equity of 32%.
The Zacks Consensus Estimate for PHM's 2023 earnings has been revised upward to $9.13 per share from $9.05 in the past 30 days. Its earnings topped consensus estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 15.6%. Again, it carries an impressive VGM Score of A.
M.D.C. Holdings: This U.S. based homebuilding and financial services company gained 25.3% in the past three months. In first-quarter 2023, earnings surpassed the Zacks Consensus Estimate. Revenues also beat the same, backed by improving mortgage rates and a low unemployment rate. MDC expects an increasing community count to help drive volume in 2023.
Earnings estimates for MDC’s 2023 have increased to $3.39 per share from $3.23 in the past 30 days. The company’s earnings surpassed the Zacks Consensus Estimate in two of the trailing four quarters and missed on other two occasions, the average surprise being 27.8%. Impressively, it carries a VGM Score of A.
Owens Corning: The world leader in building material systems and composite solutions increased 29.7% in the past three months. Its first-quarter 2023 earnings and net sales surpassed the Zacks Consensus Estimate as all the segments performed well relative to market conditions, especially the North American residential businesses.
The Zacks Consensus Estimate for OC’s 2023 earnings has been upwardly revised to $10.52 per share from $10.42 in the past week. Its earnings topped consensus estimates in the trailing four quarters, with the average surprise being 15.1%. Also, it holds a VGM Score of B.
PGT Innovations: North Venice, Florida-based PGTI gained 30% in the past three months. Its first-quarter 2023 earnings surpassed the Zacks Consensus Estimate. The top and the bottom line increased from the year-ago period’s levels, owing to strong operational execution, solid pricing actions and cost-containment efforts.
The Zacks Consensus Estimate for PGTI’s 2023 earnings has been upwardly revised to $1.95 per share from $1.90 over the past week. Its earnings topped consensus estimates in three of the trailing four quarters and lagged on one occasion, with the average surprise being 19.1%. It holds a VGM Score of B.
Comfort Systems: This leading provider of commercial, industrial and institutional heating, ventilation, air conditioning (HVAC) and electrical contracting services rose 14.2% in the past three months. Its first-quarter 2023 earnings and net sales surpassed the Zacks Consensus Estimate and grew from the prior year’s levels. Backlog also increased in the quarter, reflecting ongoing demand strength in traditional and modular construction. Strong quarterly earnings were driven by solid segments and favorable resolution of certain litigation matters.
The Zacks Consensus Estimate for FIX’s 2023 earnings has been upwardly revised to $7.17 per share from $6.35 over the past two months. Its earnings topped consensus estimates in the trailing four quarters, with the average surprise being 20.2%. It has a VGM Score of B.
LSI Industries: This advanced lighting, graphics and display solutions provider fell 11.3% compared with the industry’s 21.6% decline in the past three months. Its third-quarter fiscal 2023 earnings and net sales surpassed the Zacks Consensus Estimate and improved year over year on continued demand strength within the Lighting segment, margin management and consistent operational execution.
The Zacks Consensus Estimate for LYTS’ 2023 earnings has been upwardly revised to 77 cents per share from 72 cents in the past 60 days. Its earnings topped consensus estimates in the trailing four quarters, with the average surprise being 60.4%. Importantly, it holds a VGM Score of A.