More home builder income is on the way. What to expect.

PulteGroup, Taylor Morrison, Meritage and MDC report their results this week.

The time of dreams

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Builders’ shares have remained stuck in a rut even as a wave of buyers continues to fuel a robust housing market. Headwinds will continue for the sector, but analysts are bullish ahead of this week’s earnings.

Although the


S&P 500 Index of the Residential Construction Sub-Industry

advanced more than the


S&P 500

since the start of the year, much of this increase has occurred in the first half of the year. Over the past three months, homebuilders have had a cumulative return of minus 4.5% at Friday’s close, while the S&P 500 has posted a return of 3.4% over the same time frame.

Housing demand remains strong, even though it is down from its competitive postpandemic peak, by many accounts. Existing home sales rose 7% month over month in September, hitting the fastest seasonally adjusted annual rate since January, according to the National Association of Realtors.

Investors and builders have worried about labor and material shortages. Supply chain disruptions leading to material shortages have weighed on builders since lumber prices began to climb in 2020. In May, the majority of builders surveyed by the National Association of Home Builders reported a shortage of wood. everything from plywood to doors and windows.

Supply chain constraints increased in the second half of the year, Wells Fargo analyst Deepa Raghavan wrote in a September report. Such shortages appear to affect the entire industry rather than one manufacturer in particular, Raghavan added.

Investors will have a better idea of ​​the impact of these challenges on earnings this week. PulteGroup (ticker: PHM), one of the largest builders of public housing, warned in September that supply chain issues would reduce its third quarter housing closures. Within a week of the announcement, PulteGroup stock fell around 10.5%. The manufacturer publishes its results on Tuesday.

Other major manufacturers have issued similar warnings. DR Horton lowered his sales forecast in late September, while Lennar missed sales expectations, both citing supply constraints.

Still, analysts expect PulteGroup’s sales to increase from the same quarter last year, forecasting a $ 3.4 billion annual increase in sales. The company forecasts residential construction gross margins between 26.4% and 26.6%, more than in the same quarter last year.

Investors will listen to calls of color from PulteGroup and other builders on how long these shortages last and how companies are overcoming them. The two


Taylor Morrison Home

(TMHC) and


Meritage Houses

(MTH) reports the results on Wednesday, while


MDC Holdings

(MDC) will follow on Thursday. All three are smaller builders, with market caps of between $ 3.5 billion and $ 4 billion. Barron has previously said that Meritage and MDC look like good deals and highlighted Taylor Morrison as a value game.

Recent comment from the management of another small public builder,


Tri Pointe Houses

(TPH), suggests that the shortages will likely persist into the next year. The $ 2.8 billion-by-market-cap builder reported profits last week.

Tri Pointe beat analysts’ estimates on earnings per share and sales, and delivered more homes than the company expected. Still, the builder has said it is grappling with supply chain disruptions that have slowed its pace of construction. “We are experiencing supply chain issues across our residential construction footprint and we expect these issues to persist into 2022,” said Doug Bauer, CEO of Tri Pointe.

Shortages of materials and labor mean it takes longer to complete a home, which is negative for builders due to the taxes and other costs associated with holding the property for longer periods of time. Wedbush analyst Jay McCanless said in a recent note. Additionally, buyers can cancel if the lead time becomes too long and go for other options.

Lennar, one of the largest homebuilders, said on his conference call with investors that its third quarter cancellation rate was historically low, despite a longer cycle time. Investors will be watching other manufacturers for signs to the contrary.

Despite recent concerns about shortages, analysts have a favorable view of the housing market in general and of builders. On average, annual sales to


DR Horton

(DHI),


Lennar

(LEN),


NVR

(NVR) and PulteGroup, the four largest public manufacturers, are expected to grow 27% in fiscal 2021 and an additional 16% in 2022. This is well above the group’s pre-pandemic growth of 6.4 % from 2018 to 2019.

“We expect total and single-family housing starts to grow 4% and 7%, respectively, in 2022 and 2023, as current supply constraints will eventually ease, driven by favorable demand drivers and market conditions. supply still tight, while we note that affordability remains relatively reasonable. to long-term averages, ”JPMorgan analyst Michael Rehaut wrote in mid-October, adding that the real estate cycle could continue for several years.

But there might be a few bumps along the way.

Write to Shaina Mishkin at [email protected]


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