Rising Housing Costs And Aging Trends Will Compress Margins

Key Takeaways

• Shrinking buyer pool and persistent margin pressures from incentives threaten revenue growth and profitability, despite cost controls.
  
• Demographic challenges and exposure to volatile markets create long-term demand risk and increased earnings volatility.
  
• Strong demand for affordable homes, a flexible land-light strategy, and financial stability position the company for growth and resilience through economic cycles.

Catalysts

Engages in the design, development, construction, marketing, and sale of single-family attached and detached homes.

• The rapid erosion of housing affordability due to elevated home prices, stagnating wage growth, and high interest rates is shrinking the pool of potential buyers, which is expected to weigh on both future revenues and margins as Century Communities is forced to increase incentives and reduce average sales prices to maintain sales volumes.
  
• Demographic headwinds, including an aging U.S. population and declining household formation among core buyer cohorts, may undermine long-term demand for new homes, causing a structural drag on unit volumes and impacting the company's ability to sustain top-line growth.
  
• Margin pressures are likely to intensify as the company expects incentives – already up significantly year-over-year and poised to rise further – to remain the primary tool for driving home sales, directly offsetting any gains from cost controls and leading to lower gross and net margins in the next several years.
  
• Heightened exposure to cyclical Sun Belt and Mountain West markets leaves Century Communities vulnerable to localized economic slowdowns, oversupply risk, and steeper revenue declines if regional demand or pricing deteriorate, making earnings more volatile and less predictable.
  
• Increasing construction and regulatory costs from labor shortages, rising input prices, and more stringent environmental requirements are expected to erode profitability, while any missteps in inventory and land management could result in further impairment charges and reduced return on equity.

Century Communities Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Century Communities compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Century Communities's revenue will decrease by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.0% today to 2.6% in 3 years time.
• The bearish analysts expect earnings to reach $108.3 million (and earnings per share of $3.93) by about August 2028, down from $260.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.6x on those 2028 earnings, up from 6.9x today. This future PE is greater than the current PE for the US Consumer Durables industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 5.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.01%, as per the Simply Wall St company report.

Century Communities Future Earnings Per Share Growth

Risks

• Century Communities is benefiting from a continued underlying demand for affordable new homes, driven by favorable demographic trends such as Millennials and Gen Z entering peak homebuying years, which is likely to support ongoing revenue growth.
  
• The company's disciplined and flexible land-light business strategy allows it to limit risk, flexibly control inventory, and secure better lot pricing, which can help preserve margins and reduce losses during cyclical downturns.
  
• Despite higher incentives being used to drive sales, the company has successfully reduced direct construction costs and continues to expect further reductions, supporting improvement or stability in gross margins and net earnings.
  
• A record high community count is being established, with continued plans to increase communities year-over-year, which provides a base for expanded future sales volume and revenue as market conditions improve.
  
• Strong liquidity, robust share repurchase activity below book value, and no significant debt maturities until 2027 give the company financial flexibility to manage through economic cycles and capitalize on market upswings, supporting intrinsic value and potential share price appreciation.

Valuation

• The assumed bearish price target for Century Communities is $49.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Century Communities's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $70.0, and the most bearish reporting a price target of just $49.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.1 billion, earnings will come to $108.3 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $60.87, the bearish analyst price target of $49.0 is 24.2% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.