Mortgage Buydowns And Community Expansion Will Face Market Headwinds

Key Takeaways

• Mortgage rate buydowns and increased community count aim to boost sales and drive revenue growth despite soft demand.
  
• Strong land position and low debt levels provide strategic growth opportunities and flexibility for future investments.
  
• Reliance on mortgage rate buydowns and rising expenses could pressure margins, while declining contracts and macroeconomic uncertainty threaten revenue stability and earnings.

Catalysts

Engages in the construction and sale of single-family residential homes in Ohio, Indiana, Illinois, Minnesota, Michigan, Florida, Texas, North Carolina, and Tennessee.

• M/I Homes has implemented mortgage rate buydowns to boost sales in challenging market conditions and plans to continue this approach, which could help stabilize or increase revenue despite soft demand.
  
• The company has increased its community count and projects a 5% growth in community count in 2025, which can drive revenue growth through increased home deliveries.
  
• M/I Homes has a strong land position with a 5-year supply of owned and controlled lots, ensuring strategic growth and influencing future revenue and margins positively if market conditions improve.
  
• The company maintains a strong balance sheet with low debt levels, providing flexibility for future investments or buybacks that may support earnings growth.
  
• M/I Homes' focus on the supply-demand imbalance in housing could lead to long-term revenue growth opportunities as household formations increase, supporting the company's optimism for favorable industry conditions.

M/I Homes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming M/I Homes's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.5% today to 9.9% in 3 years time.
• Analysts expect earnings to reach $526.0 million (and earnings per share of $20.45) by about April 2028, down from $563.7 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 9.8x on those 2028 earnings, up from 5.2x today. This future PE is greater than the current PE for the US Consumer Durables industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 2.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.69%, as per the Simply Wall St company report.

M/I Homes Future Earnings Per Share Growth

Risks

• The reliance on mortgage rate buydowns to drive sales, due to uneven demand, could lead to sustained pressure on gross margins throughout the year. This strategy, while necessary to incentivize buyers, impacts overall profitability and may continue to lower net margins compared to previous years.
  
• Declining new contracts, particularly in key regions such as the Southern and Northern regions, where they decreased by 11% and 8% respectively, could further reduce revenue and strain profits if this trend continues.
  
• Deliveries have decreased by 8% year-over-year, which, alongside a 7% decline in revenue, signifies potential challenges in maintaining stable revenue streams moving forward.
  
• Uncertainty in macroeconomic conditions, such as interest rate fluctuations, inflation concerns, and potential recession talks, continues to diminish consumer confidence, impacting sales volumes and possibly affecting future revenues and earnings.
  
• Increased community count and additional headcount have led to a rise in expenses, with SG&A expenses increasing by 2%. This could put additional pressure on net margins if sales do not proportionately increase to offset these higher costs.

Valuation

• The analysts have a consensus price target of $168.0 for M/I Homes 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 $185.0, and the most bearish reporting a price target of just $151.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.3 billion, earnings will come to $526.0 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $109.33, the analyst price target of $168.0 is 34.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.