Capitalising On Strategic Acquisitions And Affordability For Sustainable Growth

Key Takeaways

• Strategic acquisitions and focus on entry-level homes enhance market presence, affordability, and potential revenue growth in key markets.
  
• Strong financial position and controlled growth strategy suggest improved net margins and sustained investment support for future earnings.
  
• Rising mortgage rates and increased spec home inventory could pressure margins and limit future revenue growth if housing demand weakens.

Catalysts

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

• The acquisition of two homebuilders, Anglia Homes and Landmark Homes, has deepened Century Communities' presence in existing markets, particularly in Houston, enhancing their long-term delivery growth and increasing revenue potential.
  
• Century Communities' focus on entry-level homes, price points below FHA limits, and the use of FHA, USDA, or VA loans make their offerings more affordable, thus potentially increasing future sales as market conditions evolve, impacting revenues positively.
  
• The significant growth in community count and lot inventory, with projects largely in the Southeast and Texas, positions the company for increased market share and delivery growth, directly influencing future revenue streams and market presence.
  
• The company's strategy of leveraging fixed costs, exemplified by a year-over-year decline in SG&A as a percent of home sales, alongside controlled growth, indicates potential for improved net margins going forward.
  
• Strong cash position, increase in book value, and no senior debt maturities until 2027 provide financial flexibility to support continued strategic investments and growth, potentially enhancing future earnings and shareholder returns.

Century Communities Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Century Communities's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 8.2% in 3 years time.
• Analysts expect earnings to reach $479.3 million (and earnings per share of $14.91) by about November 2027, up from $322.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.4x on those 2027 earnings, up from 8.3x today. This future PE is lower than the current PE for the US Consumer Durables industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.98%, as per the Simply Wall St company report.

Century Communities Future Earnings Per Share Growth

Risks

• Rising mortgage rates have led to a decrease in order activity, which could limit future revenue growth if the trend continues.
  
• The company has significantly increased its spec home inventory, which could pressure margins if the housing market slows and unsold inventory accumulates.
  
• Purchase price accounting related to acquisitions is expected to depress gross margins by 30 to 50 basis points in upcoming quarters, potentially impacting earnings.
  
• Increased incentives have been necessary to maintain sales volume, indicating pressure on pricing and margins that could affect future profitability.
  
• Growth through acquisitions may present integration challenges and could result in unforeseen costs or inefficiencies, impacting net margins and earnings.

Valuation

• The analysts have a consensus price target of $108.33 for Century Communities based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $119.0, and the most bearish reporting a price target of just $96.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.9 billion, earnings will come to $479.3 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 9.0%.
• Given the current share price of $85.8, the analyst's price target of $108.33 is 20.8% higher.
• 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.