The Q1 earnings season is gathering steam and investors are eagerly awaiting results from major homebuilders, which have remained in the spotlight throughout the quarter for a number of reasons. The quarter witnessed massive volatility on uncertainty over the number of interest rate hikes and inconsistent monthly homebuilding data.
Evidently, the S&P Homebuilders Select Industry Index has dropped 8.8% year to date. Again, the Zacks Homebuilding Industryhas declined 1% so far this year, comparing unfavorably with the broader market’s (S&P 500) return of 3.8%.
Indeed, the U.S. stock market seems to have taken a brief hiatus. That said, positive momentum at the start of the first-quarter reporting cycle remains intact for the industry given the solid earnings outlook and favorable economic fundamentals.
Homebuilding at a Glance
Sales of previously-owned homes jumped in February, marking the first gain in the last three months. This shows that an increasing number of Americans are looking to buy homes despite rising prices and limited availability.
As revealed by the National Association of Realtors (NAR), existing-home sales ticked up 3% in February to a seasonally adjusted annual rate of 5.54 million units from 5.38 million in January. Sales increased 1.1% from the year-ago level. The surge in existing-home sales (accounting for 90% of the market), after the slump in the last two months, indicates that competition is expected to heat up in the traditional spring home-buying season.
Meanwhile, new home sales increased 0. 5% year over year in February but dropped 0.6% from the prior month to a seasonally adjusted annual rate of 622,000 units. Building permits, though down 5.7% month over month, rose 6.5% year over year in February.
Rising mortgage rates and high prices of homes from inventory squeeze are indeed a bottleneck for buyers (mostly first-time). Apart from concerns over possibilities of a series of rate hikes by the Federal Reserve, homebuilders continue to grapple with growing labor shortage, limited land availability, higher material costs and a constrained mortgage environment. These are keeping homebuilders from responding to growing demand.
That said, the homebuilders’ confidence reading for March was a solid 70 buoyed by growing demand. In spite of inventory shortage, robust demand from a solid economy and a cheerful job market are making the industry go strong. With the strong economic fundamentals in place, the overall homebuilding picture is pretty encouraging for 2018.
Solid Q1 Earnings Expectations
Majority of the Zacks broad sectors (14 out of 16) are expected to be in the positive territory in the first quarter of 2018. Notably, homebuilding companies are broadly grouped in the Construction sector (one of the 16 Zacks sectors) and companies seem to be on solid ground. Per the latest Earnings Preview, construction sector earnings are expected to increase 35.4% in the first quarter compared with 20.6% in the preceding quarter. Revenues are expected to rise 15.8% (13.3% growth in Q4), while margins are likely to grow 1% (0.4% in Q4).
In spite of the inventory woes and higher costs, it is a profitable strategy to zero in on a handful of housing stocks that are poised to beat earnings this quarter. An earnings beat would also pave the way for stock price appreciation.
Notable Q1 Releases So Far
A close look at the recently-released numbers of the nation’s homebuilding bigwigs unveils an encouraging picture. KB Home( KBH) came up with stellar first-quarter fiscal 2018results on solid fundamentals. Earnings surpassed the Zacks Consensus Estimate by 33.3% and surged 116.7% from the year-ago quarter. Though revenues missed the consensus mark, it increased 6% year over year, driven by higher housing revenues.
Lennar Corporation( LEN) posted better-than-expectedearnings and sales on solid demand. Notably, the company completed the CalAtlantic buyout in February. Stuart Miller, Chief Executive Officer of Lennar, said, "Our first quarter results begin to display the true power of this combination. Although these results do not include 2 ½ months of CalAtlantic's operations, all company metrics have performed as expected or better and we have grown more confident in our ability to exceed our $100 million synergy target in 2018 and we are on track to meet our $365 million synergy target in 2019."
Which Are the Right Picks?
Picking the right stocks could be a daunting task given the wide range of companies in the housing space. One way to do it is by choosing stocks that have the combination of a favorable Zacks Rank — #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and positive Earnings ESP.