Spec Homes And Financing Incentives Will Sustain Demand Into 2025

Key Takeaways

• Century Communities anticipates growth through increased home deliveries and strategic positioning across multiple states, boosting revenue and improving margins.
  
• The company focuses on affordability, acquisitions, and cost management to sustain demand, enhance margins, and drive net income growth.
  
• Volatility in mortgage rates and increased incentives risk pressuring margins, while rising inventories and immigration enforcement may impact costs and profitability.

Catalysts

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

• Century Communities anticipates a 10% year-over-year increase in home deliveries in 2025, supported by a record-breaking community count and expanded lot inventory. This growth is expected to drive future revenue.
  
• The company is strategically positioned in 17 states, minimizing risk from regional downturns. By growing its presence within existing markets and leveraging its national platform, Century aims to increase market share, supporting revenue growth and improving margins.
  
• With a focus on affordability, the company plans to maintain a competitive sales pace through its spec home model and captive mortgage subsidiary, offering financing incentives. This approach is intended to sustain demand and potentially enhance net margins by efficiently managing costs.
  
• Century Communities has successfully integrated two acquisitions in 2024, contributing to organic growth and improved earnings. Future acquisitions could provide additional catalysts for scale and efficiency, impacting earnings positively.
  
• The ongoing reduction of SG&A expenses as a percentage of home sales revenue, through fixed-cost leverage, is expected to improve operating margins. This efficiency should support net income growth moving into 2025.

Century Communities Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Century Communities's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.6% today to 7.2% in 3 years time.
• Analysts expect earnings to reach $408.4 million (and earnings per share of $12.73) by about March 2028, up from $333.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.0x on those 2028 earnings, up from 6.4x today. This future PE is lower than the current PE for the US Consumer Durables industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 2.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.56%, as per the Simply Wall St company report.

Century Communities Future Earnings Per Share Growth

Risks

• Volatility in mortgage rates and elevated levels of incentives needed to drive sales could pressure gross margins and net income if these trends continue or worsen.
  
• Rising inventories in regions like Florida and Texas represent a risk of oversupply, potentially impacting sales and pricing power, thereby affecting revenue and net margins.
  
• The impact of heightened immigration enforcement on construction labor costs poses a risk to maintaining current cost levels, potentially affecting net margins.
  
• Dependence on using incentives such as mortgage rate buydowns to maintain sales pace indicates pressure on revenues, as it may reduce profitability unless offset by cost efficiencies.
  
• The possibility of reduced volume growth in certain markets if absorption rates remain stagnant or decline could impact overall revenue and delivery targets.

Valuation

• The analysts have a consensus price target of $88.5 for Century Communities based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.7 billion, earnings will come to $408.4 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 9.6%.
• Given the current share price of $68.71, the analyst price target of $88.5 is 22.4% 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.