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Homebuilder stocks are in a sweet spot, and they're getting cheaper as earnings and sales estimates rise

By Philip van Doorn

Investors may be looking at a remarkable opportunity in the stock market, as homebuilders are trading low compared with the broad indexes.

Homebuilders in the U.S. are entering what may be the best of times. Demand is strong, and mortgage rates are near record lows. And their stocks are trading at low valuations to expected earnings -- they even got cheaper over the past three weeks.

On April 13, we looked at U.S. homebuilders and related stocks (link), and pointed out how low price-to-earnings ratios were and how high growth estimates for the group were. In this update, we're looking only at the homebuilders, and remarkable recent developments.

Read:S&P Case-Shiller 20-city home price index up 11.9% in February from a year ago (link)

Relatively cheap

First, take a look at the homebuilders as a group -- there are 15 of them in the S&P Composite 1500 Index (which itself is made up of the S&P 500 , the S&P 400 Mid Cap Index (MID) and the S&P Small Cap 600 Index ).

Here's a five-year chart showing rolling forward price-to-earnings ratios for the S&P 1500 homebuilders industry group and the full S&P Composite 1500:

The forward P/E ratios in the chart are weighted by market capitalization and based on consensus estimates among Wall Street analysts polled by FactSet.

It's customary for the homebuilders to trade at lower P/E valuations than the index. But they are much cheaper than usual on this basis. As of the close on April 30, the homebuilders industry group traded at a weighted forward P/E of 9.4, which was 44% of the S&P Composite 1500's weighted forward P/E of 21.6. But over the past five years, the builders have traded at an average forward P/E of 10.8, which has been 60% of the index's five-year average forward P/E of 18.1.

Estimates rising

In the previous look at the homebuilders, based on April 12 data, we showed that 14 of the 15 builders were expected to increase sales by double digits in 2021 and that seven were expected to do so in 2022.

For most of the homebuilders, sales-growth estimates have increased considerably since April 12, while earnings estimates have risen even more, which has driven a decline in forward P/E ratios.

Sales estimates

First, here's how much analysts expect sales for the group to increase in 2021 and 2022:

The data is for calendar years, as some companies have fiscal years that don't match calendar years or even calendar quarters. For this reason, the 2020 column is analysts' estimates for the calendar year.

The homebuilders on all the tables are sorted by market capitalization.

Among the five largest builders, PulteGroup Inc. (PHM) is expected to show the largest increase in revenue this year, while D.R. Horton Inc. (DHI) and Toll Brothers Inc. (TOL) are expected to be the only ones continuing with double-digit increases in sales in 2022.

Now here's how much those sales estimates increased between April 13 and April 30:

Not all the figures are impressive, but in such a hot housing market, pricing power means the effect of the expected sales increases is magnified, as you can see in the earnings estimates below.

Earnings estimates

Leaving the homebuilders in the same order, here's how much analysts expect their earnings per share to increase in 2021 and 2022.

Analysts expected high double-digit or better EPS growth in 2021 for nearly all of these companies, except for LGI Homes Inc. (LGIH) and Cavco Industries Inc. (CVCO)

The earnings feast is expected to continue in 2022 with another double-digit earnings increases for 11 of the 15, including NVR Inc. (NVR) and Toll Brothers. A notable exception is Lennar Corp. (LEN), for which EPS in 2022 are expected to increase only by 1%.

And here you can see that between April 12 and April 30, the EPS estimates for many of the companies increased much more than the sales estimates did:

For seven of the 15 builders, the consensus EPS estimates for 2021 have increased by double digits in less than three weeks. This has happened with eight of the stocks for 2022 EPS estimates.

Changes in forward P/E ratios

This table shows the decline in forward P/E ratios for 13 of the 15 homebuilders between April 12 and April 30, even though most of the share prices increased:

Wall Street's favorites

Here's a summary of opinion for the homebuilders among Wall Street analysts:

Don't miss:Have you held any of these 20 stocks long term? Your current dividend yield might surprise you (link)

-Philip van Doorn; 415-439-6400;


(END) Dow Jones Newswires

05-08-21 1022ET

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