MW Home builders' stocks have soared since we said they were cheap. These five are expected to grow profits rapidly through 2025.
By Philip van Doorn
Demand for new homes has been strong, despite high mortgage-loan rates
Back in October, we published a list of 17 home-builder stocks and showed that the group was trading cheaply on a forward price-to-earnings basis when compared with the S&P 500, and also when compared with its own long-term average valuations. The builders' stocks have soared since then, so it is time for another stock screen.
The October list included all home builders in the S&P Composite 1500 Index XX:SP1500, which is made up of the S&P 500 SPX, the S&P MidCap 400 MID and the S&P Small Cap 600 SML.
Based on data pulled as of the close on Oct. 11, the S&P Composite 1500 home-building industry group was trading at a weighted forward price-to-earnings ratio that was low relative to the broad indexes and to its long-term average valuations. Since then, the home-builder stocks as a group have returned a weighted 44.3%, while the S&P Composite 1500 has returned 19.4% and the S&P 500 has returned 19.5%, with dividends reinvested, according to FactSet.
When the list was published in October, one reader asked whether it might be a bad idea to consider home builders for investment "with a recession on the horizon, not to mention stagflation with higher interest rates for longer."
Well, there is always a recession on the horizon, and we cannot tell how far away that horizon is. And the current interest-rate environment may actually help home builders, because demand for new homes is supported by reluctance of homeowners to sell if they have low-interest-rate mortgage loans locked in.
This underscores how important it is for you to form your own opinion about the direction of the economy before investing in a cyclical industry. Before the Federal Reserve began to raise interest rates in 2022, it may have seemed reasonable to assume that home builders would suffer from a dramatic increase in mortgage-loan interest rates. But that hasn't happened.
Read: New-home sales post biggest jump since December 2022
Getting back to the home builders, let's take a fresh look at valuations. Here are forward price-to-earnings ratios for S&P Composite 1500 home-building industry group, the full S&P 1500 and the S&P 500, along with five-year and 10-year averages. The average P/E ratios are based on rolling prices and weighted aggregate 12-month earnings-per-share estimates among analysts polled by FactSet:
Industry group or index Forward P/E 5-year average P/E 10-year average P/E
S&P Composite 1500 home-building industry group 10.5 9.0 10.5
S&P Composite 1500 19.9 19.0 17.8
S&P 500 20.4 19.5 18.1
Source: FactSet
The home builders remain cheaply valued relative to the broad indexes, but they are no longer priced low relative to the industry group's five-year and 10-year average valuations.
A new screen of home builders' stocks
Looking again at the S&P Composite 1500, our list of 17 U.S. home builders has been reduced to 16, because M.D.C. Holdings was acquired by the Japanese Sekisui House Ltd. (JP:1928) on April 19.
Here are total returns for the 16 home builders since Oct. 11 (the date for which we pulled data for the previous article) along with forward P/E ratios. The list is sorted by market capitalization.
Company Ticker Total return since Oct. 11 Forward P/E 5-year average forward P/E 10-year average forward P/E Current P/E to 5-year average Current P/E to 10-year average Market cap ($mil) D.R. Horton Inc. DHI 40% 10.1 8.8 10.2 115% 99% $49,858 Lennar Corp. Class A LEN 42% 10.5 8.6 10.0 123% 105% $39,448 PulteGroup Inc. PHM 55% 9.0 7.5 9.3 120% 96% $24,600 NVR Inc. NVR 26% 15.5 14.2 14.7 109% 105% $24,290 Toll Brothers Inc. TOL 68% 9.2 7.8 9.7 118% 95% $13,168 Meritage Homes Corp. MTH 52% 8.9 7.5 8.5 119% 104% $6,558 Taylor Morrison Home Corp. TMHC 37% 7.2 6.2 7.8 117% 93% $6,242 KB Home KBH 54% 8.5 7.3 9.2 117% 92% $5,296 Tri Pointe Homes Inc. TPH 44% 8.6 7.5 8.7 114% 98% $3,758 M/I Homes Inc. MHO 47% 6.8 5.9 7.5 114% 90% $3,410 Cavco Industries Inc. CVCO 38% 16.7 18.0 21.3 92% 78% $3,160 Frontdoor Inc. FTDR 14% 13.9 21.2 21.1 66% 66% $2,796 Century Communities Inc. CCS 32% 7.9 6.6 7.0 118% 112% $2,682 Patrick Industries Inc. PATK 57% 13.3 10.2 12.2 131% 109% $2,555 Green Brick Partners Inc. GRBK 35% 7.4 7.4 10.2 100% 72% $2,524 LGI Homes Inc. LGIH 1% 9.7 9.9 9.3 98% 104% $2,316 Source: FactSet
Most of the builders are now trading well above their five-year average forward P/E valuations, but the valuations remain below or close to the 10-year averages. And the group remains cheaply priced relative to the S&P 500. There is no way to know whether or not investors might continue to "re-rate" this industry group. Could it move closer to the broad indexes' P/E valuations over the long haul?
Leaving the builders in the same order, here are expected compound annual growth rates for revenue and earnings per share from calendar 2023 through calendar 2025, based on estimates among analysts polled by FactSet. Five (shown here in bold) are expected to increase earnings at a double-digit annualized pace through 2025:
Company Ticker Two-year estimated sales CAGR through 2025 Two-year estimated EPS CAGR through 2025 D.R. Horton Inc. DHI 5.2% 6.1% Lennar Corp. Class A LEN 5.5% 5.1% PulteGroup Inc. PHM 6.3% 8.8% NVR Inc. NVR 6.6% 11.5% Toll Brothers Inc. TOL 3.6% 4.3% Meritage Homes Corp. MTH 3.6% 4.6% Taylor Morrison Home Corp. TMHC 5.9% 7.3% KB Home KBH 5.2% 7.8% Tri Pointe Homes Inc. TPH 12.8% 15.3% M/I Homes Inc. MHO 5.6% 7.4% Cavco Industries Inc. CVCO 4.5% 6.6% Frontdoor Inc. FTDR 4.4% 6.4% Century Communities Inc. CCS 11.9% 12.3%
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