The U.S. housing market has boomed over the past two years, thanks to ultra-low interest rates and increasing demand amid a remote working environment. Home prices rose 16.9% in 2021 and are expected to rise again this year. Home sales have increased 8.5% year-over-year to 6.12 million homes, the highest since 2006.
The growing economy, rising demand for housing, and income growth are the main factors that will keep sales levels high in 2022, despite climbing mortgage interest rates. Amid the sustained purchasing power of homebuyers, the median home sale price is projected to rise 2.9% in 2022. Given these factors, we think it is advisable to invest in the stocks of homebuilding companies NVR, Inc. (NVR) and Hovnanian Enterprises, Inc. (HOV), which could achieve robust growth.
However, restrained supply and Fed’s hawkish tilt are expected to adversely affect fundamentally weak homebuilding stocks D.R. Horton, Inc. (DHI) and Lennar Corporation (LEN). Thus, we think these stocks are best avoided now.
Stocks to Buy:
NVR, Inc. (NVR)
NVR operates as a homebuilder in the U.S. The Reston, Vs., company operates in two segments: Homebuilding; and Mortgage Banking. It builds, markets, and sells single-family detached homes, townhomes, and condominium buildings under NV Homes, Ryan Homes, and Heartland Homes brands. It also provides various mortgage-related services to its homebuilding customers and brokers.
Yesterday, NVR announced the repurchase of $500 million of its outstanding common stock. With this share repurchase program, NVR’s total outstanding shares are expected to fall, thereby boosting EPS and ROE.
In its fiscal 2021 fourth quarter, ended Dec. 31, 2021, NVR’s homebuilding income increased 21.1% year-over-year to $392.01 million. Its income before taxes increased 10.8% year-over-year to $426.81 million. And the company’s net income grew 9.7% year-over-year to $334.58 million, while its earnings per share rose 15.8% year-over-year to $89.09.
The $2.31 billion consensus revenue estimate for its fiscal first quarter, ending March 2022, represents 17.8% year-over-year growth. And the $96.98 consensus EPS estimate for the current quarter indicates 53.4% year-over-year growth.
Shares of NVR have gained 10% in price over the past year and closed yesterday’s trading session at $5,113.01.
NVR’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
It has a grade of B for Momentum, Sentiment, and Quality. It is ranked #5 of 24 stocks in the B-rated Homebuilders industry. Click here to see NVR ratings for Value, Growth, and Stability.
Hovnanian Enterprises, Inc. (HOV)
HOV designs, constructs, markets, and sells residential homes in the U.S. HOV operates in two segments: Homebuilding; and Financial Services. The Red Bank, N.J. company builds and sells single-family detached homes, attached townhomes, urban infill, and active lifestyle homes. The company’s homes are marketed and sold under the trade name K.
HOV’s total revenues increased 19.2% year-over-year to $814.35 million in its fiscal fourth quarter, ended Oct. 31, 2021. The company’s income before income taxes rose 82.5% year-over-year to 77.45 million. Its net income increased 29.2% from its year-ago value to $52.48 million. The company’s adjusted EBITDA grew 38.9% year-over-year to $120.96 million, and its net income per common share grew 33.8% year-over-year to $7.41.
The stock gained 67.3% in price over the past year and closed yesterday’s trading session at $92.74.
HOV has an overall B rating, which translates to Buy in our POWR Rating system. It has n A grade for Value, and a B grade for Momentum. It is ranked #6 of 24 stocks in the B-rated Homebuilders industry. Click here to see HOV ratings for Sentiment, Growth, Quality, and Stability.
Stocks to Avoid:
D.R. Horton, Inc. (DHI)
Fort Worth, Tex.-based DHI operates as a homebuilder in the East, North, Southeast, Southwest, South Central, and Northwest regions in the U.S. The company acquires land, and constructs and sells residential homes, and provides mortgage financing services. It operates in 31 states and more than 98 markets under D.R. Horton, Express Homes, Freedom Homes, and America’s Builder brands.
On July 29, 2021, DHI priced a public offering of $600 million of 1.3% senior notes due 2016. The interest will be paid semi-annually at a rate of 1.3% per year on the senior notes. This note offering might increase the company’s debt and interest burden.
For its fiscal year 2022 first quarter, ended Dec.31, 2021, DHI’s cost of sales increased 13.2% year-over-year to $7.05 billion. The company’s cash and cash equivalents declined 23.9% over the three months ended Dec. 31, 2021, to $2.44 billion. Its cash outflow from investing and financing activities amounted to $26.50 million and $572 million, respectively.
The stock has declined 21.4% in price year-to-date and 13.3% over the past six months. DHI closed yesterday’s trading session at $85.30.
This bleak outlook is reflected in DHI’s POWR ratings. Within the Homebuilders industry, it is ranked #12 of 24 stocks. To see additional POWR Ratings (Growth, Quality, Stability, Value, Sentiment, and Momentum) for DHI, click here.
Lennar Corporation (LEN)
LEN operates as a homebuilding company under the Lennar brand in the U.S. The Miami, Fla, concern operates through two segments: Homebuilding; and Financial Services. It offers various operations, including construction and sale of single-family attached and detached homes, purchase, development, sale of residential land, and managing multifamily residential properties. It also offers residential mortgage financing services.
On Jan. 27, 2022, LMC, a wholly owned LEN subsidiary, announced the opening of the Emblem Grayson apartment community in Loganville, Ga, to provide affordable housing to middle-income renters. This apartment community consists of 344 apartment homes. The company is expected to take some time to realize gains from this venture because Emblem Grayson has just commenced leasing and welcoming new residents.
On Jan. 11, 2022, LMC, a wholly owned subsidiary of Lennar Corporation, commenced leasing at Citizen, a high-rise community in Denver’s historic Golden Triangle neighborhood. Citizen consists of 393 luxury apartment homes and townhomes. The company might take a while to realize profits from this high-rise housing community.
LEN’s homebuilding costs and expenses increased 18.4% year-over-year to $6.25 billion in its fiscal fourth quarter, ended Nov. 30, 2021. Its financial services revenues declined 11.4% year-over-year to $228.96 million. Lennar’s other operating earnings decreased 144.5% year-over-year to negative $176.19 million.
Analysts expect LEN’s EPS for its fiscal first quarter, ending February 2022 to come in at $2.60, representing an 18.8% decline year-over-year.
The stock has declined 20.8% in price year-to-date and 15.4% over the past six months, and closed yesterday’s trading session at $92.02.
LEN is ranked #9 of 24 stocks in the Homebuilders industry. To see LEN’s POWR ratings for Growth, Sentiment, Momentum, Stability, Value, and Quality, click here.
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DHI shares were trading at $83.76 per share on Thursday morning, down $1.54 (-1.81%). Year-to-date, DHI has declined -22.56%, versus a -7.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...
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