Ways to Play the Rebound in Housing Starts
Lumber producers Canfor and West Fraser and homebuilder PulteGroup remain undervalued.
October construction activity rebounded with rising single- and multi-family starts, offsetting weaker September activity. The fourth quarter of 2016 started strong as single-family starts hit a monthly high for 2016, led by a surprise uptick in the U.S. South, despite Hurricane Matthew. As anticipated, October multi-family starts rebounded from a soft September to match July for the strongest month of the year. Despite rain in the U.S. South, favorable weather conditions throughout the country allowed for seasonally strong building activity. October remained in line with our long-term expectations of strong housing demand as millennials move into age groups in which households form rapidly, before housing demand returns to normalized levels of around 1.5 million annual starts.
Within the wood products space, we believe both Canfor and West Fraser remain materially undervalued, trading at 47% and 24% respective discounts to our fair value estimates. Concerns surrounding the resilience of the housing rebound and uncertainty over North American softwood trade have kept share prices depressed. As residential construction grows stronger, high utilization rates will allow relatively low-cost lumber producers to earn attractive profit margins in the coming years.
Homebuilders posted another strong quarterly performance, and leading indicators, such as backlog value and community count, point to continued growth into 2017. Industry backlog value increased 13% year over year, while community count grew 2%. Although we expect all of the homebuilders under our coverage to increase sales and earnings in 2017, we believe PulteGroup is currently the most undervalued homebuilder. We like that PulteGroup’s new CEO remains dedicated to the firm’s capital-friendly value-creation strategy, and we think the company’s renewed focus on entry-level buyers is prudent and should support double-digit growth next year.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.