July housing data indeed reflects a soft housing momentum for the time being. Nevertheless, the 2017 outlook for homebuilding seems to be solid given strong economic growth and labor market. The U.S. economy grew faster-than-anticipated in the second quarter (fastest pace in more than two years) and shows a significant jump from the first quarter’s lackluster 1.2% growth. The economy grew at an annual rate of 3% in the April-June period, the Commerce Department said in its second estimate on Aug 30. Along with this, solid homebuilders’ confidence (up 4 points mon-over-month to 68 in Aug) raises optimism about the entire construction sector.
The housing/homebuilding industry has been riding high on steady job and wage growth, historically low mortgage rates, rapidly increasing household formation and a limited supply of inventory. The positive momentum is evident from the robust Zacks Industry Rank (Top 16% out of more than 250 industries).
One such company cashing in on the positive momentum is M/I Homes, Inc. (MHO - Free Report) one of the nation's leading builders of single-family homes. Let us delve deeper into the other factors which make this Zacks Rank #2 (Buy) stock a lucrative pick.
Solid Growth Prospects
While M/I Homes has had a historical EPS growth rate of 45.5% compared with the industry average of 28.5%, investors should really focus on its projected growth. Here, the company is looking to grow at a rate of 37.1%, a lot higher than the industry average of 18%. Meanwhile, its revenues for the year are expected to increase 14.1%, higher than the industry’s 8% expected growth.
Estimates on the Upswing
We note that earnings estimates for M/I Homes have exhibited a good uptrend, reflecting optimism in the stock’s prospects. The Zacks Consensus Estimate for the company’s current-year earnings has moved up 0.7%, over the last 60 days. Also, next year’s earnings estimates have climbed 2.4% over the same time frame.
Valuation Looks Rational
M/I Homes has a Value Score of B, putting it into the top 40% of all stocks we cover from this perspective.
We find the price-to-book ratio as the best multiple for valuing homebuilders because of their asset-driven nature. M/I Homes currently has a trailing 12-month P/B ratio of 0.95 comparing favorably with the industry’s P/B ratio of 1.18. Hence, its lower-than-market positioning hints at more upside in the quarters ahead.
Also, the company has a trailing 12-months price-to-earnings (P/E) ratio of 9.6, while the industry’s average stands at 14.1. Moreover, its forward P/E ratio (compared with this year’s earnings) is at 8.1, compared with the industry’s 11.6. This indicates that a slightly more value-oriented path may be ahead for M/I Homes.
Solid VGM Score
The company boasts an impressive VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics. In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 make solid investment choices.
Other Stocks to Consider
Other top-ranked stocks worth considering in the Zacks Homebuilding Industry are NVR, Inc. (NVR - Free Report) , sporting a Zacks Rank #1, and Beazer Homes USA, Inc. (BZH - Free Report) and KB Home (KBH - Free Report) , carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Full-year 2017 earnings for NVR and KB Homes are expected to increase 33.9% and 51.7%, respectively.
Beazer Homes beat estimates in three of the past four quarters, with the average being 103.47%.
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