After largely benefiting from the pandemic housing boom and home improvement over the past two years, homebuilders and building products stocks have recently experienced adverse price developments. These companies posted record profits and gross margins during this period, spurred by a surge in demand caused by lower borrowing rates.
Mortgage rates have been rising over the past few weeks, with some places now experiencing the 30-year fixed mortgage rate at 5%. This has led to higher mortgage payments, leading to lower product demand and potentially driving away new applicants in the future.
It was well known that mortgage rates would rise before the end of 2022, but the speed at which they climbed came as an unpleasant surprise. To put it into perspective, on March 3, the 30-year fixed rate mortgage average was 3.76%; it is now at 4.67% as of March 31st and the highest since December 2018.
Typically, construction of new homes starts in the spring and continues through the summer months due to favorable weather conditions. Now, with the increase in tariffs, it is possible that the best season for these companies will be negatively affected.
Labor market strength
However, demand has been so strong that homebuilders say they have had no problem fulfilling canceled contracts, web traffic levels have remained the same and sales areas have remained full. In addition, the labor market has remained tight and the economy appears to be very strong.
Wednesday’s ADP jobs report was better than expected, indicating that 455,000 new jobs were created in the private sector. In addition, the Bureau of Labor Statistics (BLS) released its new Jobs Situation Report this morning, which shows that the unemployment rate fell from 3.8% to 3.6% and that the number of unemployed fell from 318,000 to six million. Notable employment gains continued in leisure and hospitality, professional and business services, retail and manufacturing.
So that brings us to an interesting point regarding the outlook for the industry for this year and next. Mortgage rates have soared, signaling demand may be slipping back, but the labor market is robust, the Fed says the economy is currently strong and workers are making more money than ever. And now?
I think it’s way too early to accurately predict the future that lies ahead of this industry, mainly due to the unexpected speed at which mortgage rates have risen over the past two weeks. However, with a tight labor market and the current strength of the economy, I think it is worth considering a few of these stocks for investors.
I selected two names – Century Communities, Inc (CCS) and Builders First Source, Inc (BLDR) – that would benefit from continued strong demand for residential construction and a strong economy. Both stocks boast strong Zacks rankings, have low forward earnings multiples and have seen positive earnings estimate revisions over the past 60 days.
Century Communities, Inc.
Century Communities CCS is a construction and home building company that builds, markets and sells various detached and attached single family home projects. The Colorado-based homebuilder currently sports an extremely low future earnings multiple of 3.1X, well below the industry average of 5.4X.
Analysts have raised their earnings estimates over the past 60 days. For current year and next year earnings, the consensus estimate trend was up 13% to $17.24 per share and 18% to $18.33 per share. Next quarter’s estimate rose 2% to $4.16 per share, and next quarter’s estimate rose nearly 32% to $3.92 per share.
Image source: Zacks Investment Research
Fourth-quarter 2021 revenue of $1.2 billion represented a significant jump of 26% from the third quarter of 2021. Revenue from its home sales, a vital business segment, increased by 33 % year-over-year from 2020 to 2021, and the $4.7 billion revenue forecast for next year in this line of business reflects a 16% increase from 2021. overall revenue of $5.1 billion for the year represents a 15% year-over-year increase.
The homebuilder has chained nine consecutive earnings beats, and over the past four quarters, the average EPS surprise has been 40%. Century Communities is currently a Zacks Rank #1 (Strong Buy).
Century Communities, Inc. Price, Consensus, and EPS Surprise
Century Communities, Inc. price-consensus-eps-surprise-chart | Quote from Century Communities, Inc.
FirstSource Builders, Inc.
Builders FirstSource BLDR is a leading supplier and manufacturer of structural and related building products for new residential construction in the United States. The company currently has a forward earnings multiple of 7.3X, well below and attractive to the Zacks Building Products – Retail Industry average of 15.2X.
Over the past 60 days, the consensus trend for next quarter earnings estimates edged down 3.7% to $1.82 per share, but next quarter trend soared 84% to 2.08 $ per share. Current-year earnings estimates have risen nearly 30% to $8.90 per share, and next-year’s estimate has climbed 33%, now reflecting annual earnings of 9.23 $ per share.
Image source: Zacks Investment Research
Opening the balance sheet, we can see that the company’s revenue jumped 132% year-over-year from 2020 to 2021. Over the same period, BLDR’s revenue from its lumber segment jumped 173%, windows and doors revenue soared 105%, and manufactured goods revenue increased 165%. Additionally, Zacks Consensus’ current year sales estimate reflects revenue growth of 2.3% year-over-year.
Impressively, the company has chained a streak of 14 consecutive quarterly EPS beats dating back to November 2018. BLDR beat estimates by nearly 47% in its latest quarter and acquired a surprise four-quarter average EPS of 74%. BLDR is currently a Zacks Rank #1 (Strong Buy) with an overall VGM score of an A.
Builders FirstSource, Inc. Price, Consensus, and EPS Surprise
Builders FirstSource, Inc. price-consensus-eps-surprise-chart | Builders FirstSource, Inc. Quote
5 shares ready to double
Each was handpicked by a Zacks expert as the #1 preferred stock to earn +100% or more in 2021. Previous recommendations have skyrocketed +143.0%, +175.9%, + 498.3% and +673.0%.
Most of the stocks in this report fly under the radar on Wall Street, which provides a great opportunity to get in on the ground floor.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.