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4 Factors That Underscore M/I Homes' (MHO) Solid Prospects

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M/I Homes, Inc. MHO has been riding high on improved absorption pace, operating efficiencies and solid housing market fundamentals.

Shares of this Columbus, OH-based homebuilder have returned 98.9% year to date, steadily outperforming the Zacks Building Products - Home Builders industry’s 50.6% rally. Also, it has outperformed the S&P 500’s 26% rise in the said period. The price performance was backed by the company’s robust earnings surprise history, having surpassed the Zacks Consensus Estimate in six of the trailing seven quarters. Its revenues surpassed the consensus mark in all the trailing seven quarters.

Earnings estimates for 2020 have moved 12% north in the past 60 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank  stocks here.

 

 

Let us delve deeper into other factors that make this stock a profitable pick.

What Makes the Stock an Attractive Pick?

Solid Backlog: M/I Homes — which shares space with Meritage Homes Corporation MTH, KB Home KBH and M.D.C. Holdings, Inc. (MDC - Free Report) in same industry — has impressive revenue prospects, given solid backlog level. Backlog as of Sep 30, 2019 was $1.1 billion, almost in line with the year-ago level.

In the first nine months of 2019, new contracts increased 9% to a record 5,096 from 4,672 in the corresponding period of 2018.

Precisely, in the third quarter, new contracts increased 32%, homes delivered grew 16%, revenues improved 15% and net income was up 29%. Gross margin improved 130 basis points (bps) to 20.5% from the second quarter of 2019. SG&A expenses were 12.2% of revenues, improving 50 bps from 12.7% a year ago, reflecting higher operating leverage.

Focus on Smart Series Affordable Homes: The company continues to focus on “Smart Series” floor plans of smaller square footage to target a more affordable sales price in several of its markets. “Smart Series” is aimed at entry-level and move-down buyers, and gives significant attention toward current trends and offering design flexibility to customers. At the end of the third quarter, Smart Series homes were sold in 50 of its communities or 23% of total M/I communities. In the year-ago period, the company offered Smart Series in just 8% of total M/I communities. In third-quarter 2019, Smart Series accounted for 28% of total company sales.

Solid Underlying Housing Market Fundamentals: Improved U.S. housing market fundamentals backed by lower mortgage rates, Fed’s dovish stance, solid economic growth and favorable demographics are expected to provide a major boost to demand for homes in the upcoming quarters. Also, a 50-year low unemployment rate and increased wage growth make the picture rosier.

The recent housing data also reveals encouraging prospects of the market. The recently released housing starts data for the month of November showed a 13.6% year-on-year jump. Building permits increased 1.4% to a rate of 1.482 million units in November, the highest level since May 2007. Meanwhile, a survey showed that homebuilder confidence in December jumped to the highest level since June 1999.

This positive momentum is evident from the company’s homebuilding revenue growth of 12.7% year over year in the first nine months of 2019. Home deliveries also increased 11% year over year during the period.

Superior ROE: M/I Homes’ return on equity (ROE) is indicative of growth potential. The company’s ROE of 13.8% compares favorably with the industry average of 12.1%, implying that it is efficient in using its shareholders’ funds.

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