The Building-Products-Home Builders industry, which is currently positioned in the bottom 26% (189 out of 255) among the Zacks Classified industries, has not been a performer. In a year, the industry has witnessed a decline of 17.8%. However, D.R. Horton, Inc. (DHI - Free Report) , which belong to the same industry, is an exception. The stock has inched down of 0.6% in the same time frame.
Per analysts, accretive acquisitions, robust backlog, cost-saving strategies and well-stocked inventory of land, lots as well as homes are favoring the stock. Moreover, the Zacks Rank #2 (Buy) company’s VGM Score of A and positive estimate revision in the past 60 days indicates that the stock has solid growth potential.
Acquisitions are an important growth driver for the company. In the third quarter of 2018, the company acquired two small private builders for approximately $18 million. Also, it purchased Lexington Homes to enter the Spokane, Washington market and Permian Homes to bolster position as the largest builder in the Midland/Odessa market in Texas. In fact, the company aims to diversify operations through these acquisitions.
This homebuilder has an impressive quarter-end sales order backlog (under contract) with an increase of 9.1% to 16,536 homes. Backlog value increased 7.2% to $4.98 billion in the third quarter of 2018. Meanwhile, the company’s well-stocked supply of land, plots and homes provide it a competitive edge as well as helps it meet demand in upcoming quarters, thereby driving sales and home closings. Also, the company expects homebuilding operations to invest approximately $4 billion in lots, land and development in fiscal 2018. This will surely provide a major boost to the top line.
Additionally, the company has been undertaking initiatives to reduce construction and selling as well as general and administrative (SG&A) expenses. It controls costs by designing homes efficiently as well as obtaining construction materials and labor at competitive prices. Also, the company believes a consistent sales pace through inventory turnover, which is is the best way to maximize profits and returns.
Moreover, improving labor markets, falling unemployment rates and a limited home supply are supporting a continued rise in home prices, thereby boosting homebuilders’ top line. However, rising material costs and rise in mortgage rates are probable threats.
The company also has an impressive earnings surprise history. The company’s earnings beat the Zacks Consensus Estimate in the past three out of four quarters, the average being 8.9%. Further, the Zacks Consensus Estimate for earnings for the current year is pegged at $3.87, up 41.2% year over year. Moreover, earnings estimates for 2018 and 2019 have also increased in the past 60 days, reflecting analysts’ optimism toward the company’s future earnings potential.
Other Stocks to Consider
A few other top-ranked stocks in the industry are M.D.C. Holdings, Inc (MDC - Free Report) , Toll Brothers, Inc (TOL - Free Report) and Century Communities, Inc (CCS - Free Report) , each sporting a Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
M.D.C. Holdings has an expected current-year earnings growth rate of 46.9%.
Toll Brothers has an expected current-year earnings growth rate of 44.2%.
Century Communities pulled off a positive earnings surprise of 51% in the trailing four quarters.
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