UPDATED Mar 27, 2024
Home building companies are those that buy land, develop it, and then build houses to sell. Some home builders also build homes and condominiums to rent, or to sell to REITs.
Most countries face a housing shortage - even those with declining populations. Residential and demographic patterns change over time, which means there is an ongoing need for new housing. This steady demand acts as a tailwind for home builders.
Home building is a cyclical industry, but well managed construction companies have managed to create significant value over time.
Revenues are closely correlated with the US housing starts index which is affected by mortgage rates. Margins are affected by the cost of building materials as well as inventory levels.
Current monetary policy has been a bit of a headwind for the homebuilding industry. Rising interest rates and rising inflation has meant that it’s more expensive for homebuyers to build a new home in terms of materials costs and in terms of debt financing.
These conditions could be setting the scene for a slight downturn in the homebuilding industry, however the cyclical nature of the industry means that each downturn in building activity sets up the next buying opportunity for investors.
Most building activity is quite conventional, but there are innovators experimenting with new materials and construction methods, including 3D house printing and energy efficient buildings.
9 companies
D.R. Horton, Inc. operates as a homebuilding company in East, North, Southeast, South Central, Southwest, and Northwest regions in the United States.
Large homebuilder catering to all demographics.
Trading at 43.1% below our estimate of its fair value
Earnings are forecast to grow 4.87% per year
Significant insider selling over the past 3 months
Toll Brothers, Inc., together with its subsidiaries, designs, builds, markets, sells, and arranges finance for a range of detached and attached homes in luxury residential communities in the United States.
Leader in the luxury homes sector expanding their reach.
Price-To-Earnings ratio (9.3x) is below the US market (16.8x)
Earnings are forecast to grow 2.35% per year
Earnings grew by 7.1% over the past year
Significant insider selling over the past 3 months
Lennar Corporation, together with its subsidiaries, operates as a homebuilder primarily under the Lennar brand in the United States.
Second largest homebuilder in the US experimenting with new construction methods.
Trading at 18.5% below our estimate of its fair value
Earnings are forecast to grow 3% per year
No risks detected for LEN from our risks checks.
Diversified revenue provides stability in market downturns.
Price-To-Earnings ratio (16x) is below the US market (16.8x)
Earnings are forecast to decline by an average of 3.6% per year for the next 3 years
Significant insider selling over the past 3 months
M/I Homes, Inc., together with its subsidiaries, engages in the construction and sale of single-family residential homes in Ohio, Indiana, Illinois, Minnesota, Michigan, Florida, Texas, North Carolina, and Tennessee.
Smaller homebuilder with a focus on sustainability.
Trading at 91.4% below our estimate of its fair value
Earnings are forecast to grow 3.55% per year
Significant insider selling over the past 3 months
Summit Materials, Inc. operates as a vertically integrated construction materials company in the United States and Canada.
Materials supplier providing the building blocks for the future of construction.
Trading at 37.1% below our estimate of its fair value
Earnings are forecast to grow 24.95% per year
Earnings have grown 37.9% per year over the past 5 years
Interest payments are not well covered by earnings
Shareholders have been diluted in the past year
Large one-off items impacting financial results
Tecnoglass Inc. manufactures, supplies, and installs architectural glass, windows, and associated aluminum and vinyl products for commercial and residential construction markets in Colombia, the United States, Panama, and internationally.
Materials supplier diversified across the commerical and residential sectors.
Price-To-Earnings ratio (13.5x) is below the US market (16.8x)
Earnings are forecast to grow 4.55% per year
Earnings grew by 17.4% over the past year
High level of non-cash earnings
voxeljet AG provides three-dimensional (3D) printers and on-demand parts services to industrial and commercial customers in Europe, the Middle East, Africa, the Asia Pacific, and the Americas.
Innovator in the construction industry pursuing new building techniques.
Earnings have grown 0.8% per year over the past 5 years
Highly volatile share price over the past 3 months
Does not have a meaningful market cap ($6M)
Shareholders have been diluted in the past year
Capitalizing on the home growers market.
Trading at 46.3% below our estimate of its fair value
Earnings are forecast to grow 8.78% per year
Profit margins (9.9%) are lower than last year (14.6%)
Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned.