Homebuilders’ stocks are in a sweet spot and getting cheaper as earnings and sales estimates rise

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Home builders in the US are entering what may be the best of times. Demand is strong and mortgage rates are near record lows. And its shares are trading at a low valuation relative to expected earnings; They even got cheaper in the last three weeks. On April 13, we looked at US homebuilders and related stocks, noting how low the price-earnings ratios were and how high the growth estimates were for the group. In this update, we only look at home builders and notable recent developments.

Read: S&P Case-Shiller 20 City Home Price Index up 11.9% in February from a year earlier Relatively cheap First, take a look at homebuilders as a group – there are 15 of them in the S&P Composite 1500 SP1500 Index, + 0.39% (which in turn is made up of the S&P 500 SPX, + 0.31%, the S&P 400 Mid Cap Index MID, + 0.70% and the S&P Small Cap 600 Index SML, + 1.00 %). Below is a five-year chart showing progressive price-to-earnings ratios for the S&P 1500 homebuilders industry group and the full S&P Composite 1500:

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Forward P / E ratios in the chart are weighted by market capitalization and are based on consensus estimates among Wall Street analysts surveyed by FactSet. It is common for home builders to trade at lower P / E valuations than the index. But they are much cheaper than usual on this basis. At the close of April 30, the homebuilders industry group was trading at a weighted advanced P / E of 9.4, which was 44% of the S&P Composite 1500’s weighted advanced P / E of 21.6. But over the past five years, builders have traded at an average leading P / E of 10.8, which has been 60% of the index’s five-year average leading P / E of 18.1. Based on data from April 12, we show that 14 of the 15 homebuilders were expected to increase sales by double digits in 2021 and seven were expected to do so in 2022. For most homebuilders, growth estimates of sales have risen sharply since April 12, while earnings estimates have risen further, causing future P / E ratios to decline. Sales estimates First, here is what analysts expect the group’s sales to increase in 2021 and 2022:

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The data is for calendar years, as some companies have fiscal years that do not coincide with calendar years or even calendar quarters. For this reason, the 2020 column is the analyst estimates for the calendar year. Home builders in all tables are ordered by market capitalization. Among the top five builders, PulteGroup Inc. PHM, + 1.44% is expected to show the largest increase in revenue this year, while DR Horton Inc. DHI, + 1.72% and Toll Brothers Inc. TOL, + 1.63% are expected to be the only ones that continued double-digit sales increases in 2022. Now, here’s how much those sales estimates increased between April 13 and April 30:

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Not all of the numbers are impressive, but in such a busy real estate market, pricing power means that the effect of expected sales increases is magnified, as you can see from the earnings estimates below. Many analysts expect its earnings per share to increase in 2021 and 2022.

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Analysts expected high EPS growth of double digits or better in 2021 for almost all of these companies, except LGI Homes Inc. LGIH, + 2.63% and Cavco Industries Inc. CVCO, + 0.57% The earnings party is expected to continue in 2022 with other double-digit earnings increases for 11 of the 15, including NVR Inc. NVR, + 1.37% and Toll Brothers. A notable exception is Lennar Corp. LEN, + 1.78%, for which EPS in 2022 is expected to increase by just 1%. And here you can see that between April 12-30, EPS estimates for many of the companies increased much more than sales estimates:

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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 the 2022 EPS estimates. Changes in future P / E ratios This table shows the decline in future P / E ratios for 13 of the 15 homebuilders between 12 and 30 April, although prices increased:

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Wall Street Favorites Here’s a summary of the opinion of home builders among Wall Street analysts:

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