PHM: 3 Buy-Rated Homebuilder Stocks to Own in 2021

The housing sector was seeing steady demand prior to the COVID-19 pandemic. But while the pandemic disrupted the business of most industries, it actually accelerated the growth of home-building companies as people, finding themselves having to work from home, with their children locked out of school, began seeking bigger and better living spaces. A low mortgage-rate environment has further bolstered demand for new home ownerships and home upgrades.

Investors’ interest in homebuilding stocks is reflected in SPDR Series Trust SPDR Homebuilders ETF’s (XHB) 30.5% returns over the past year.

With a diminished need generally for certain types of workers to work from company offices or sites, and with a desire to flee congested, COVID-19 intense cities, people are migrating in droves from cities to suburban regions. With this seismic demographic shift, demand for homes has taken off and should keep growing. As a result, companies in the home building space with broad geographic footprints are likely to gain more in the coming weeks and months. The continuation of the low interest-rate environment should also support the industry’s growth in the foreseeable future. Federal Reserve Chairman Jerome Powell has affirmed that he sees no interest rate hikes on the horizon.

Given this backdrop, we think it wise to invest in fundamentally sound homebuilding stocks like PulteGroup, Inc. (PHM), Meritage Homes Corporation (MTH), and M/I Homes, Inc. (MHO).

PulteGroup, Inc. (PHM)

Based in Atlanta, Georgia, PHM today ranks as the nation’s third largest homebuilding company with operations in 23 states and 42 major markets. The company’s segments include homebuilding and financial services. PHM’s portfolio of brands include Centex, Pulte, Del Webb, DiVosta, John Wieland Homes and Neighborhoods, and American West.

For the fourth quarter ended December 31, 2020, the company’s total revenue increased 5.8% year-over-year to $3.19 billion. Its homebuilding revenues, which accounted for 96.7% of total revenue, increased 4.7% year-over-year to $3.06 billion. Its net new orders increased 24% year-over-year to 7,056 homes and order value increased 33% year-over-year to $3.3 billion. Its net income increased 30.5% year-over-year to $438.11 million, yielding EPS of $1.62, which surpassed the Street’s estimate by 7%.

Analysts expect PHM’s revenue to increase 27% for the quarter ending March 31, 2021, 23.8% this year and 7% next year. The company’s EPS is expected to grow 19.3% this year, 10.7% next year and at a rate of 13.8% per annum over the next five years. The company has an impressive earnings surprise history; it beat consensus EPS estimates in each of the trailing four quarters.

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Last month, PHM announced the commencement of cash tender offers to purchase up to $300 million of its outstanding 5.5% senior notes due 2026 and 5.0% senior notes due 2027. Also last month, the company announced its plans to enter the Denver market and expand into the Triad area of North Carolina. PHM approved a 17% increase in its quarterly cash dividend to $0.14 per common share, which was paid on January 5. On a year-to-date basis, the stock has gained 7.5% to close yesterday’s trading session at $46.36.

PHM’s strong fundamentals are reflected in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

The stock has an overall rating of B, which equates to Buy in our proprietary rating system. PHM has a grade of B for Value and Quality.

In addition to the POWR Ratings grades I have just highlighted, you can see the PHM ratings for Growth, Momentum, Stability and Sentiment here.

Also, the stock is ranked #3 of 24 stocks in the B-rated Homebuilders industry.

Meritage Homes Corporation (MTH)

Founded in 1985, MTH designs and builds single-family homes in the U.S. Having closed on the sale of more than 135,000 homes, the company has invested millions of dollars in a relentless pursuit of building better, smarter and healthier homes. MTH’s homebuilding segment is engaged in acquiring and developing land, constructing homes, and marketing and selling those homes.

MTH’s total orders for the fourth quarter (ended December 31, 2020) increased 52% year-over-year, driven by an 87% increase in absorptions per store that was largely due to general market strength, as well as strong demand for MTH’s entry-level homes. Its home closing revenue increased 27.7% year-over-year to $1.41 billion. Its net earnings increased 47.2% year-over-year to $152.53 million, and its EPS increased 49.8% year-over-year to $3.97.

Analysts expect the company’s revenue to increase 16.4% for the quarter ending March 31, 2021, 15.5% for the quarter ending June 2021 and 18.9% in 2022. MTH’s EPS is expected to grow 39.9% for the quarter ending March 31, 2021, 8% this year and at a rate of 10.9% per annum over the next five years. The company has an impressive earnings surprise history; it beat consensus EPS estimates in each of the trailing four quarters.

On November 17, 2020, MTH announced an industry-first expansion to its healthy home construction offerings. MTH’s Homes has already begun installing MERV-13 filters as a standard in all its new homes and now carries the Environmental Protection Agency’s (EPA) Indoor airPLUS certification. The company announced on September 21, 2020 that its total orders for July and August 2020 had increased 73% year-over-year to 2,675 homes. The stock has gained 18% over the past year to close yesterday’s trading session at $85.30.

Under POWR Ratings, MTH has been accorded a grade of B for Value and Quality. In addition to the POWR Ratings grades I have just highlighted, you can see MTH’s ratings for Growth, Momentum, Stability and Sentiment here.

The stock is ranked #8 in the Homebuilders industry.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

M/I Homes, Inc. (MHO)

With more than 40 years of new home construction experience, MHO has built more than 130,000 homes across 15 markets. The company operates through Midwest homebuilding, Southern homebuilding, Mid-Atlantic homebuilding and financial services operations segments. MHO serves a broad section of the housing market, including first-time, move-up, luxury and empty-nester buyers.

The company’s revenue climbed more than 22% year-over-year to an all-time quarterly record of $906.43 million for the fourth quarter ended December 31, 2020. Homes delivered also increased 16.7% to 2,242, which is an all-time company quarterly record. Its total homebuilding revenue increased 21.3% year-over-year to $880.88 million. Its net income increased 91.7% year-over-year to $80.08 million, yielding adjusted EPS of $2.95, which increased 87.9% year-over-year.

Analysts expect the company’s revenue to increase 24% for the quarter ending March 31, 2021, 8.2% this year and 4.4% next year. MHO’s EPS is expected to grow 22% for the quarter ending March 2021, 8.6% in 2022 and at a rate of 12.5% per annum over the next five years. The company has an impressive earnings surprise history; it beat consensus EPS estimates in each of the trailing four quarters.

MHO announced on August 11, 2020 that it had appointed Kumi D. Walker, the Chief Business Development & Strategy Officer for Root Insurance, Inc., to the company’s Board of Directors. Robert H. Schottenstein, CEO and President of MHO said in a fourth quarter earnings release that “Housing conditions are very good and, given the strength of our record backlog and strong competitive position across our markets, we are well positioned for another strong year in 2021″. The stock has gained 17.5% over the past six months to close yesterday’s trading session at $49.88.

MHO has a grade of A for Value. To see additional POWR Ratings for Growth, Momentum, Stability, Sentiment and Quality for MHO, click here.

In the Homebuilders industry, MHO is ranked #11.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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PHM shares were trading at $46.58 per share on Thursday morning, up $0.22 (+0.47%). Year-to-date, PHM has gained 8.02%, versus a 2.88% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...