Housing Industry Outlook Strong, Despite High Lumber Prices
Frenzy in the homebuilding market is sending stocks like Hovnanian Enterprises (NYSE: HOV), Century Communities (NYSE: CCS) and Beazer Homes (NYSE: BZH) to new highs.
A year ago, as businesses shut down over pandemic fears and millions became unemployed overnight, very few would have guessed that a real estate boom was on the horizon.
But that’s exactly what happened.
Housing starts fell in February, the last full month of data, amid unusually cold weather nationwide. March numbers aren’t in yet, but analysts believed the February drop was a blip.
However, another headwind could be tight supplies. For example, lumber has grown more expensive, pushing up the price of a new home.
Nonetheless, the homebuilding industry is going strong. The iShares U.S. Home Construction ETF (BATS: ITB) is trading at all-time highs.
Hovnanian builds single-family detached homes, townhomes and condominiums in 14 states.
The stock vaulted more than 83% in March, following the company’s most recent earnings report. The stock closed Thursday at $106.99, down $2.80, or 2.55%.
Hovnanian earned $2.75 per share on revenue of $574.7 million. Both were up from a year ago.
In the company’s first-quarter conference call in March, CEO Ara Hovnanian cited lumber and cement costs as challenges.
“But home price increases more than offset those headwinds, as evidenced by our increased margins in the first quarter. With housing demand remaining very strong, we believe that it's likely that the industry will see additional labor and material costs as well as longer cycle times,” he said.
He added that historically first quarter has been the slowest, and he expects that will prove true again in 2021.
Historically, the company has swung back and forth between profit and losses. It earned $7.03 per share in 2020.
This is a small company, with a market cap of just $614.3 million. There is sparse analyst coverage, something not uncommon with such small firms.
The stock is extended after clearing a cup-shaped base in late January. Watch for the next pullback above the 50-day line as a possible entry point.
Century Communities builds single-family homes, townhomes and condos in 17 states. The company has been busy: In recent days, it announced new communities in Colorado, Florida and North Carolina.
Revenue grew at double-digit rates in seven of the past eight quarters; earnings growth accelerated in the past three quarters.
The company also beat Wall Street estimates in past three quarters.
Century has a strong return on equity, 18%, indicating that the company is investing its capital efficiently.
Shares are up 45.87% year-to-date and 269.13% over the past year.
Analysts’ consensus rating is “buy”, with a price target of $64.75. The stock closed Thursday at $63.66, down $1.38 or 2.12%.
The stock is trading 2.6% above its 10-day moving average. Thursday’s action was a retreat from Wednesday’s all-time high of $67.95. It’s extended from its last pullback to the 50-day line.
Beazer Homes is a small-cap company that builds homes in 13 states. Its customer base includes first-time buyers, those moving up to a larger or more expensive home, and luxury buyers.
Like other home builders, Beazer’s stock has been on a tear, notching gains in 11 of the past 12 months. It’s up 35.78% this year, and 282.34% on a one-year basis. It closed Thursday at $20.57, down $0.054, or 2.56%. It’s trading at its best levels since 2017.
The company is due to report second-quarter results on April 29. Analysts expect earnings per share of $0.52 on revenue of $558.80 million. Both would be year-over-year gains.
The company beat analysts’ earnings estimates in the past five quarters.
Analysts’ consensus rating on the stock is a “buy,” with a price target of $22, representing a 6.95% upside.
Beazer’s up/down volume ratio is 1.3, which is healthy. You can find this metric by dividing the stock’s total volume on days it ended higher by total trading volume on days it ended lower. A ratio above 1 indicates good potential for further gains.
The stock remains in buy range after pulling back from Monday’s high of $22.17, but watch for continued support above its 50-day average. Investors and traders may want to set a stop, in case it slices beneath that price line.