Zacks Industry Outlook Highlights NVR, Toll Brothers and Taylor Morrison Home

·9-min read

For Immediate Release

Chicago, IL – March 10, 2023 – Today, Zacks Equity Research discusses NVR, Inc. NVR, Toll Brothers Inc. TOL and Taylor Morrison Home Corp. TMHC.

Industry: Building Products - Homebuilders

Link: https://www.zacks.com/commentary/2063446/3-homebuilding-stocks-to-buy-despite-rate-hike-inflation-woes

Indeed, the U.S. housing space continues to grapple with accelerating mortgage rates, rising raw material and labor costs. Disruption in the supply chain has been impacting builders’ ability to deliver on time.

That said, the rising need for more work-at-home space, lack of existing homes for sale, focus on cost control, increased operating leverage and important buyouts have been aiding the Zacks Building Products - Home Builders industry. Companies like NVR, Inc., Toll Brothers Inc. and Taylor Morrison Home Corp. have been gaining from their fundamental strength and the abovementioned tailwinds.

Industry Description

The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agencies as well as closing services.

The industry players are involved in building single-family detached and attached home communities; townhouses, condominiums, duplexes and triplexes; master-planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities. The companies are also involved in the purchase, development and sale of residential land. Additionally, the companies build and own multi-family rental properties; residential real estate; and oil and gas assets.

4 Trends Shaping the Homebuilding Industry's Future

Cost-Control Efforts, Focus on Entry-Level Buyers & Acquisitions: Given the accelerated raw material prices, companies have been relying on effective cost control and focusing on making the homebuilding platform more efficient, which in turn is resulting in higher operating leverage. Homebuilders have been controlling construction costs by designing homes efficiently and obtaining construction materials and labor at competitive prices. Some homebuilders also follow a dynamic pricing model, which enables them to set the price according to the latest market conditions.

Again, the majority of companies are focused on the growing demand for entry-level homes and addressing the need for lower-priced homes, given affordability concerns in the U.S. housing market. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, market share, revenues as well as profitability.

Suburban Shift & Lack of Supply: The changing geography of housing demand has been supporting builder confidence. Demand for new homes is improving in lower-density markets, including small metro areas, rural markets and large metro exurbs, as people seek larger homes to work from home amid the pandemic. The desire for more space and amenities to accommodate working and learning from home should continue to boost the U.S. housing market in the near term.

Meanwhile, several years of production deficits during the housing downturn limited the supply of both rental and new homes in the country. Although demand has slowed recently, supply remains very low. Continued demand for homes despite rising mortgage interest rates and high home prices amid low supply has been generating profit for homebuilders.

Higher Rates: The home affordability issue remains a headwind owing to accelerating mortgage rates. While remaining committed to combating inflation, the Fed raised interest rates last year at the fastest pace since the 1980s, pushing borrowing costs above 4.5% from near zero.

The Fed has raised its benchmark fund rate eight times over the past year to its current targeted level of 4.5-4.75%. In December 2022, Fed officials projected that rates would rise to a peak of 5% to 5.25%, while in March 2023, Fed Chairman Jerome Powell cautioned that interest rates are likely to head higher than what the central bank policymakers had expected. This is less encouraging for this rate-sensitive market, which accounts for almost 3% of the economy. Rising borrowing costs and elevated risk of recession have been driving the single-family homebuilding market into recession.

Supply Chain Hurdles & Tight Labor Market: Supply-chain challenges are expected to continue to impact the level of housing starts and construction cycle times. Continuous supply-chain issues in various countries have been impacting builders’ ability to deliver on time. Rising material costs are quite challenging.

According to Associated Builders and Contractors' latest analysis of information provided by the U.S. Bureau of Labor Statistics, construction input prices grew 4.9% in January from a year ago. With Europe facing severe energy crises, supply-chain disruptions are likely to persist in the near term as well. Again, the shortage of skilled labor continues to be a pressing concern.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Home Builders industry is a 19-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #62, which places it in the top 25% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of higher earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since December 2022, the industry’s earnings estimates for 2023 have increased 1.8%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperform Sector and S&P 500

The Zacks Building Products - Home Builders industry has outperformed the S&P 500 Index and the broader Zacks Construction sector in the past year.

Over this period, the industry has gained 8.8% compared with the S&P 500’s decline of 8%. The broader sector has gained 3.6% over the time frame.

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 9.5 compared with the S&P 500’s 17.9 and the sector’s 14.3.

Over the last five years, the industry has traded as high as 11.6X and as low as 4.2X, with a median of 8.9X.

3 Homebuilding Stocks to Buy Now

We have selected three stocks from the Zacks homebuilding space that currently carry a Zacks Rank #1 (Strong Buy) and #2 (Buy) and are expected to register growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NVR: This Reston, VA-based homebuilder is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. In order to serve homebuilding customers, NVR operates a mortgage banking and title services business. A disciplined business model and focus on maximizing liquidity and minimizing risks have been aiding NVR. The lot acquisition strategy helps the company to avoid financial requirements and risks associated with direct land ownership and land development. This strategy allows it to gain efficiencies and a competitive edge over its peers.

NVR currently holds a Zacks Rank #1. Its shares have gained 24.4% over the past six months, outperforming the industry. NVR has seen an upward estimate revision for 2023 earnings over the past 30 days to $394.77 per share from $357.51 per share.

Taylor Morrison Home: This Scottsdale, AZ-based homebuilder’s ongoing operational enhancements, acquisition synergies and robust pricing power have been more than offsetting the inflationary pressure and delay in some closings. The company’s well-balanced, diverse mix of portfolio and operating strategy are encouraging.

TMHC has expanded its market footprint and product positioning in recent years through acquisitions and impressive organic growth, thereby serving a broad range of consumers in the entry-level, first-and-second move-up and resort lifestyle segments across the country. The success of these efforts has been driving growth for the company and has been enhancing its liquidity level, enabling the company to take advantage of investment opportunities as the market evolves.

TMHC shares have jumped 44% over the past six months, faring much better than the industry. The Zacks Consensus Estimate for its 2023 earnings has been upwardly revised to $6.46 per share from $4.92 per share over the past 30 days.

Toll Brothers: Based in Horsham, PA, Toll Brothers is a leading builder of luxury homes. The company has been benefiting from its strategy of broadening its product lines, price points and geographies. Also, it has been gaining from the lack of competition in the luxury new home market, its build-to-order approach and solid backlog level.

The TOL stock has gained 29.8% over the past six months, outperforming the industry’s 23.8% rise. Earnings estimates for fiscal 2023 have increased to $8.48 per share from $7.87 per share over the past 30 days.

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