2 Quality Homebuilder Stocks to Own Before Potential Rate Cuts
The homebuilder space is pretty appealing given that Fed rate cuts in September may lead to softer mortgage rates, thus higher demand and supply of homes. While the effects might take a little while to manifest themselves, steady-rate declines should propel homebuilders as much as buyers and sellers towards greater equality, thus ensuring that the market stabilizes without shocking spikes in demand that could be stressful on supply.
Knowing this perspective, it might be wise to keep an eye on quality homebuilder stocks: PulteGroup, Inc. (PHM) and NVR, Inc. (NVR).
The U.S. economy grew at an annualized rate of 3.0% in Q2, above the 1.8% non-inflationary target. Inflation is on the Fed’s 2% goal, thus easing price concern. Most importantly, a 25-basis point rate cut is due soon that will reduce the rate on borrowing, and unemployment is likely to remain steady at 4.2%, thus pointing towards steady job supply.
That also means that mortgage rates dropped to 6.20%, the cheapest since February 2023, though high home prices and shortages of supply are holding the line pretty tight. That means rates may be cut another notch if the Fed lowers them next week, thereby providing more tailwind for the homebuilding market. Growth of U.S. residential construction market stands at 4.5% CAGR till 2028.
In addition, the sector benefits directly from population growth, urbanization, growing incomes, and government initiatives for affordable housing-all factors that facilitate broad market growth and position the industry for sustained growth going forward. Based on these favorable trends, let’s take a deeper look into the basic elements of the two Homebuilders industry picks to watch, starting with the second option.
Stock #2: PulteGroup, Inc. (PHM)
PHM is engaged in the United States homebuilding operations. The Company acquires and develops land for non-commercial purposes and builds housing on such land. It also provides a range of home designs, or “Centex,” “Pulte Homes,” “Del Webb,” “DiVosta Homes,” “American West,” and “John Wieland Homes and Neighborhoods.”.
On September 4, 2024, PHM declared a quarterly cash dividend of $0.20 per share, payable on October 2, 2024, to shareholders of record at the close of business on September 17, 2024.
3 Stocks to Double This Year
PHM is pre-selling Deep Creek at Jordanelle Ridge, marking the company’s first Utah community in more than 20 years. Starting in the mid-$700Ks, this Heber City lifestyle of outdoor living with urban amenity deals will offer eight home designs starting this year, along with to-be-delivered townhomes and amenities.
When comparing the trailing-12-month EBIT margin, PHM flaunts 21.59%, which is 174% higher than the average for the sector of 7.88%. Its trailing-12-month EBITDA margin of 22.09% is 93.1% higher than the industry average of 11.44%. Also, the stock’s trailing-12-month Return on Common Equity of 26.92% is 136.4% higher than the average for the sector of 11.39%.
PHM’s total revenues for the fiscal second quarter that ended on June 30, 2024, rose 9.8% year-over-year to $4.60 billion. The company’s net income came in at $809.13 million, a 12.3% year-over-increase, while its EPS grew 19.3% over the prior-year quarter to $3.83.
Street expects the revenue for PHM to rise 7.1% year-over-year for the quarter ending September 30, 2024 to $4.29 billion. EPS for the same quarter is expected to rise 10.1% year-over-year to $3.19. It topped the consensus EPS estimates in each of the trailing four quarters. The stock has gained 72.6% over the past year, closing the last trading day at $135.30.
The positive opinion is reflected in the POWR Ratings for PHM. It has an overall rating of B, which translates to a Buy in our proprietary rating system. Stocks are rated according to 118 different factors, each assigned with its own weighting.
This is ranked #3 of 23 stocks in the B-rated Homebuilders industry, with an A in Momentum, a B in Sentiment, and a B in Quality. Click here for the grades of PHM in Growth, Value, and Stability.
Stock #1: NVR, Inc. NVR
NVR works in the United States as a homebuilder. The firm operates through two operating segments: Homebuilding and Mortgage Banking. It operates through its Homebuilding segment, which designs single-family detached homes, townhomes, and condominium buildings under names of Ryan Homes, NVHomes, and Heartland Homes.
NVR’s 16.18% trailing-12-month net income margin is 257.8% more than the 4.52% industry average. The firm’s 20.29% trailing-12-month EBIT margin is 157.5% more than the 7.88% industry average. Again, the stock’s 25.57% trailing-12-month Return on Total Assets is 526.9% more than the 4.08% industry average.
Revenue for the fiscal second quarter ended June 30, 2024, increased by 11.6% year-over-year to $2.55 billion, while operating income for NVR was $495.25 million, 12.2% up from the year-earlier figure. Net income was $400.90 million. Moreover, EPS improved by 3.6% during the quarter over the prior-year comparable at $120.69.
Analysts expect NVR to report a 5% year-over-year increase in its quarterly EPS and revenue to $131.52 and $2.69 billion, respectively, for September 30, 2024. The company has surpassed the Street EPS estimates in three of the last four quarters. The stock has gained 40.4% during the past nine months and closed at $9,179.38 on the last trading session.
The favorable outlook NVR’s POWR Ratings encoded in reveals a B for the overall rating it boasts, or in our in-house rating system, a Buy.
NVR has an A grade for Momentum and a B for Sentiment and Quality. It ranks number two in the Homebuilders industry. Click here for Growth, Value, and Stability ratings for NVR.
What to Do Next?
Uncover 10 widely held stocks that our proprietary model says have huge downside potential. Make sure no death trap stocks are lurking in your portfolio, either.
NVR shares were trading at $9,309.26 as of Friday afternoon, up $129.88 or +1.41%. Year-to-date, NVR has gained 32.98%, compared to a 18.94% rise in the benchmark S&P 500 index in the same period.