While the housing market has faced recent turbulence with higher mortgage rates and inflationary pressures. However, the long-term prospects for the housing market remain positive. Furthermore, there might be a possibility for interest rate cuts in the near term, which could serve as an incentive for consumers to re-engage in home-buying activities.
Amid this backdrop, it might be worth investing in fundamentally sound stocks Lennar Corporation (LEN) and Tri Pointe Homes, Inc. (TPH). However, owing to the current market uncertainties, it could be wise to avoid Cyrela Brazil Realty S.A. Empreendimentos e Participações (CYRBY), given its weak fundamentals.
In recent months, home sales have bounced back and forth but remained above their cyclical lows. In May, the number of homes actively for sale increased by 21.5% compared to last year, while the total number of unsold homes, including homes under contract, decreased by 0.2% year-over-year, as the National Association of Realtors reported.
Moreover, potential buyers can find some positive news as home prices show a slight decline. In April, the median price of existing homes across all housing types was $388,800, marking a 1.7% decrease from April 2022. This represents the most significant drop in home prices since January 2012.
Furthermore, the U.S. residential construction market is anticipated to register a CAGR of over 3% between 2023 and 2028.
Although there is the possibility of positive long-term prospects in the housing market, it is important to consider that the overall economic climate can severely impact the housing sector. During economic downturns, housing demand can decrease, leading to lower property values and potential difficulties in selling or renting properties.
With these factors in mind, let us evaluate the fundamentals of the featured stocks in detail.
Stocks to Buy:
Lennar Corporation (LEN)
LEN operates as a homebuilder, primarily under the Lennar brand, through Homebuilding East; Homebuilding Central; Homebuilding Texas; Homebuilding West; Financial Services; Multifamily; and Lennar Other segments. It offers construction and sale of single-family attached and detached homes, as well as the purchase, development, and sale of residential land, etc.
On June 6, LEN introduced a higher standard of living with their new residential properties in Ibis Landing, a desirable master-planned golf community located near Fort Myers in Lehigh Acres, Florida. With its appealing attributes, Ibis Landing is poised to attract increasing interest and popularity as a thriving residential destination.
On May 10, LEN paid a quarterly dividend of $0.38 per share for Class A and Class B common stock. The company’s annual dividend of $1.50 translates to a 1.32% yield on the prevailing prices, while its four-year average dividend yield is 0.97%. Its dividend payouts have grown at CAGRs of 65.6% and 56.7% over the past three and five years, respectively.
The stock’s trailing-12-month EBIT and net income margins of 19.08% and 13.86% are 160.4% and 224.2% higher than the 7.33% and 4.28% industry averages, respectively. Likewise, its trailing-12-month ROTA of 12.87% is 253.4% higher than the industry average of 3.64%.
LEN’s total revenue increased 4.6% year-over-year to $6.49 billion in the first quarter (ended February 28, 2023), while its EBIT rose 13.3% from the year-ago value to $834.72 million. The company’s attributable net earnings and EPS amounted to $596.53 million and $2.06, representing increases of 18.5% and 21.9% from the prior-year quarter, respectively.
Street expects LEN’s revenue for the second quarter (ended May 31, 2023) to be $7.23 billion. Its EPS for the ongoing quarter is expected to be $2.30. Moreover, it surpassed the EPS estimates in each of its trailing four quarters and revenue estimates in three of its trailing four quarters, which is impressive.
LEN’s shares have gained 44.6% over the past nine months to close the last trading session at $113.37.
LEN’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Sentiment and Quality. In the 25-stock B-rated Homebuilders industry, it is ranked #7. To see additional POWR Ratings of LEN for Growth, Value, and Stability, click here.
Tri Pointe Homes, Inc. (TPH)
TPH specializes in the construction and sale of single-family attached and detached homes. It sells its homes through its own sales representatives and third-party brokers under six regional brands – Maracay, Pardee Homes, Quadrant Homes, Trendmaker Homes, Winchester Homes, and TRI Pointe Homes.
On May 24, TPH announced an exclusive, multi-year partnership with renowned design expert and Emmy-nominated TV personality Bobby Berk. Homebuyers across the country would have the opportunity to explore a new range of design-forward interior collections curated by Berk, featuring styles such as organic modern and luxe bohemian.
As a part of this partnership, it is expected that Berk will design and curate over 20 TPH model homes annually, providing customers the chance to personally experience cohesive, integrated home designs.
In terms of trailing-12-month TPH’s net income and levered FCF margins of 12.83% and 12.79% are 199.9% and 256.5% higher than the industry averages of 4.28% and 3.59%, respectively. Likewise, its trailing-12-month ROTA of 11.89% is 226.4% higher than the industry average of 3.64%.
TPH’s total revenues increased 5.9% year-over-year to $770.79 million in the first quarter (ended March 31, 2023), while its adjusted EBITDA came in at $133.98 million. The company’s net income and EPS amounted to $74.74 million and $0.73, respectively, in the same period.
During the same period, its cash and cash equivalents amounted to $966.29 million, up 8.6% compared to $889.66 million for the period that ended December 31, 2022.
Analysts expect TPH’s EPS and revenue for the fiscal year 2024 to increase by 17.8% and 12.9% year-over-year to $3.75 and $3.90 billion, respectively. Additionally, it surpassed the EPS and revenue estimates in each of its trailing four quarters, which is excellent.
Over the past nine months, the stock has gained 92.4% to close the last trading session at $32.21.
TPH’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Value and Quality. Within the same industry, it is ranked #6. Click here to see TPH’s ratings for Growth, Stability, and Sentiment.
Stock to Avoid:
Cyrela Brazil Realty S.A. Empreendimentos e Participações (CYRBY)
Headquartered in São Paulo, Brazil, CYRBY develops, constructs, and sells residential properties and provides consultancy services related to real estate. The company offers properties under the Cyrela, Living, Vivaz, and Cyrela Urbanismo brand names.
CYRBY’s trailing-12-month levered FCF margin and interest coverage ratio of 1.72% and 1.25 is 52.2% and 86.5% lower than the industry averages of 3.59% and 9.26. Likewise, its trailing-12-month asset turnover ratio of 0.36x is 64.4% lower than the industry average of 1.01x.
CYRBY’s total net revenue decreased 6.4% quarter-over-quarter to R$1.28 billion ($259.86 million) in the first quarter (ended March 31, 2023), while its gross profit declined 8.6% sequentially to R$394 million ($79.99 million).
The company’s net income amounted to R$164 million ($33.29 million), representing a decline of 21.2% from the prior quarter. Also, its profit before financial result slumped 20.9% from the prior-quarter value to R$177 ($35.93 million).
The consensus revenue estimate for the second quarter (ending June 30, 2023) is expected to be $282.32 million. The stock slumped marginally intraday to close the last trading session at $4.02.
CYRBY’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, which translates to Sell in our proprietary rating system.
It has an F grade for Quality and a D for Growth. Out of 25 stocks in the same industry, it is ranked #23. To see CYRBY’s ratings for Value, Momentum, Stability, and Sentiment, click here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
LEN shares were trading at $114.34 per share on Friday afternoon, up $0.97 (+0.86%). Year-to-date, LEN has gained 27.25%, versus a 12.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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