Despite surging home prices and increasing lumber prices, the red-hot housing industry shows no signs of slowing down due to robust demand. Housing prices rose at the fastest pace in 45 years in January. Regarding this, CoreLogic chief economist Frank Nothaft said, “In December and January, for-sale inventory continued to be the lowest we have seen in a generation … Buyers have continued to bid prices up for the limited supply on the market.”
This trend will likely continue in the near term, as mortgage rates have been plummeting sharply over the past two weeks due to the escalating geopolitical tensions between Russia and Ukraine. Moreover, the Biden administration passed the landmark $1.2 trillion infrastructure bill yesterday after being stalled in the Senate over the last two months. This should fuel the homebuilding industry’s growth further.
Given this backdrop, it could be wise to bet on quality undervalued homebuilding stocks Sekisui House, Ltd. (SKHSY), Tri Pointe Homes, Inc. (TPH), and Hovnanian Enterprises, Inc. (HOV).
Sekisui House, Ltd. (SKHSY)
Headquartered in Osaka, Japan, SKHSY is a leading global residential developer. The company operates through eight segments: Real Estate Fee; Rental Housing; Detached House; International; Urban Redevelopment; Condominium Housing; Renovation; and Exterior Business.
In January, SKHSY’s US subsidiary acquired Holt Homes Group, a leading regional residential land developer in the United States. Through this acquisition, SKHSY expanded its operations in Oregon and Washington, in line with its aim to supply 10,000 houses per year globally by 2025.
On March 10, the company announced its plans to repurchase up to 15 million shares by January 31, 2023. This share repurchase program is expected to boost EPS and ROE significantly.
SKHSY’s net sales increased 5.8% year-over-year to ¥2.59 trillion ($22.36 billion) in fiscal 2021 (ended January 31, 2022). Its operating income rose 23.4% from the year-ago value to ¥230.16 billion ($1.99 billion). The company’s ordinary income increased 24.6% year-over-year to ¥230.09 billion ($1.99 billion), while its EPS grew 25.5% year-to-year to ¥227.25.
SKHSY is undervalued compared to its peers. The stock’s forward Price/Sales multiple of 0.58 is 38.4% lower than the industry average of 0.95. In addition, its forward EV/EBITDA ratio of 6.41 is 28.1% lower than the industry average of 8.92.
Analysts expect SKHSY’s revenue to come in at $11.25 billion for fiscal 2023 (ending January 2023), representing a 5.7% growth year-over-year. The company expects operating income to rise 2.5% year-over-year to ¥236 billion ($2.04 billion) in the current year.
The stock gained marginally intraday to close yesterday’s trading session at $19.81.
SKHSY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. SKHSY has an A grade for Stability and a B for Quality and Value. The stock is ranked #1 of 24 stocks in the B-rated Homebuilders industry.
In addition to the grades I’ve just highlighted, view SKHSY’s ratings for Growth, Momentum, and Sentiment here.
Tri Pointe Homes, Inc. (TPH)
TPH specializes in the construction and sale of single-family attached and detached homes in the United States. It sells its homes through its own sales representatives and third-party brokers under six regional brands – Maracay, Pardee Homes, Quadrant Homes, Trendmaker Homes, Winchester Homes, and TRI Pointe Homes. As of the largest homebuilders in the country, TPH received the Community Builder Award from the Home Builders Care Foundation of Maryland last month.
On December 15, 2021, TPH launched a 55+ lifestyle community brand Altis. As the 55+ demographic makes up a significant proportion of the homebuyers today, this brand is expected to boost TPH’s sales tremendously in the upcoming years.
TPH’s home sales revenue increased 15% year-over-year to $1.20 billion in the fiscal fourth quarter ended December 31, 2021. This can be attributed to a 15% rise in new home deliveries and a marginal rise in net new home orders. Net income improved 28% year-over-year to $147.44 million, while EPS increased 44.6% from the year-ago value to $1.33. Adjusted EBITDA came in at $257.37 million, up 27% from the same period last year.
In terms of forward non-GAAP P/E, TPH is currently trading at 4.17x, 66.8% lower than the industry average of 12.54x. Its forward Price/Sales multiple of 0.53 is 44.2% lower than the industry average of 0.95x. In addition, the stock’s forward Price/Cash Flow and EV/EBITDA ratios of 4.54 and 3.52 compare with industry averages of 10.44 and 8.92, respectively.
The consensus EPS estimate of $1.31 for the fiscal second quarter ending June 2022 represents a 30.8% improvement year-over-year. The consensus revenue estimate of $1.08 billion for the next quarter indicates a 6.8% increase from the same period last year. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
Shares of TPH rose 9.8% over the past year to close yesterday’s trading session at $21.92.
TPH’s POWR Ratings reflect this promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary rating system. TPH also has a B grade for Quality and Value. In addition, the stock is ranked #4 of 24 stocks in the same industry.
To see additional POWR Ratings for Growth, Momentum, Stability, and Sentiment for TPH, click here.
Hovnanian Enterprises, Inc. (HOV)
HOV constructs an assortment of residential homes and active lifestyle homes with amenities across the United States. The company operates through two segments: Homebuilding; and Financial Services. Its clientele includes first-time buyers, luxury and active lifestyle buyers, and empty nesters.
HOV’s net income increased 30.9% year-over-year to $24.80 million in its fiscal 2022 first quarter ended January 31, 2022. Homebuilding gross margin percentage (after the cost of sales interest expense) rose 260 basis points from the prior-year quarter to 19.9%. Income before income taxes increased 80.8% year-over-year to $35.40 million. Its net income per common share grew 11.6% year-over-year to $3.07.
The stock’s trailing-12-month P/E multiple of 0.87 is 93.7% lower than the industry average of 13.90. In addition, HOV’s trailing-12-month Price/Cash Flow and EV/EBITDA ratios of 2.23 and 7.23 are significantly lower than the industry averages of 10.82 and 9.33, respectively.
The stock has gained marginally intraday to close yesterday’s trading session at $74.72.
According to the POWR Ratings, HOV has an A grade for Value. Also, it is ranked #13 of 24 stocks in the Homebuilders industry. Click here to see HOV ratings for Growth, Sentiment, Quality, Momentum, and Stability.
SKHSY shares were trading at $20.52 per share on Thursday afternoon, up $0.71 (+3.58%). Year-to-date, SKHSY has declined -5.57%, versus a -10.69% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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