Mortgage rates hit a three-month high last week as bond markets responded to the Federal Reserve’s statement that it would âsoonâ start cutting its fixed asset purchases. The average contract the interest rate jumped to 3.14% from 3.10% for 30-year fixed rate mortgages, the highest rate since July.
Mortgage applications for the purchase of a home fell 13% year-on-year, negatively impacting companies operating in the housing sector. In addition, the Fed’s impending cutbacks, potential changes in monetary policy, and lingering supply chain constraints are expected to weigh on the near-term outlook for the residential construction industry.
Given the bleak growth outlook for the industry, we believe residential construction stocks DH Horton Inc. (DHI), NVR Inc. (NVR), Toll Brothers Inc. (TOL) and KB Home (KBH) could suffer. a short-term downward trend. So these stocks are best avoided now.
DH Horton Inc. (DHI)
DHI is a home construction company based in the United States. Under the Express Houses, Emerald Homes and Freedom Homes brands, DHI, based in Fort Worth, Texas, acquires and develops properties, builds and sells homes in 29 states and 88 markets. In addition, DHI builds and owns multi-family rental housing and residential real estate, such as ranches and renovations, as well as oil and gas assets.
In July, DHI priced a $ 600 million subscribed public offering of 1.3% senior notes due 2026. The company plans to use the proceeds of the offering for general corporate purposes. the company.
For the nine months ended June 30, 2021, DHI’s net cash used in operating activities was $ 34.5 million. The company reported $ 829.6 million in net cash used in financing activities. His Cash and cash equivalents fell 35.6% year-on-year to $ 1.94 billion. Its net decrease in cash, cash equivalents and restricted cash was $ 1.07 billion. The stock price has fallen more than 8% in the six months and about 9% in the last month.
DHI’s POWR ratings are consistent with this grim outlook. POWR scores are calculated by considering 118 separate factors, each factor being weighted to an optimal degree.
DHI is rated D for Momentum and C for Growth and Value. Within the C-rated homebuilder industry, it is ranked # 14 out of 24 stocks.
To see additional POWR ratings for stability, feel, and quality for DHI, click here.
NVR Inc. (NVR)
NVR is a home builder based in Reston, Virginia. Residential construction and mortgage banking are the two lines of business of the company. It builds and markets single family homes, townhouses and condominiums under the names Ryan Homes, NVHomes and Heartland Homes.
In August, NVR’s board of directors approved a repurchase of $ 500 million of its outstanding common shares. A share buyback can cause stock prices to fall as investors fear that the company may not have other profitable growth opportunities.
NVR’s cash and cash equivalents decreased 4.3% year-on-year to $ 2.60 billion for the six-month period ended June 30, 2020. The share price fell more than 4% as of June 30, 2020. over the past three months and about 4% over the past month.
NVR’s poor outlook is also apparent in its POWR ratings. It also has a D rating for value and momentum, and a C for growth. NVR is ranked # 6 in the home builders industry.
Click here to see additional POWR ratings for the NVR (Stability, Quality and Feeling).
Toll Brothers Inc. (TOL)
With its subsidiaries, TOL in Horsham, Pennsylvania, designs, builds, markets and arranges financing for a variety of single and semi-detached homes in luxury residential communities in the United States. The company operates through two segments: building traditional houses; and Urban Filling. In addition, TOL builds, owns and operates golf courses and country clubs, develops and sells properties, and provides home automation and technology choices to owners.
In August, TOL acquired StoryBook Homes, a private home builder based in Las Vegas, Nevada. While this acquisition may help the company secure a strong position in the Las Vegas housing market, it could require a significant cash outflow in the near term.
During the third quarter, ended June 30, 2021, TOL’s selling, general and administrative expenses increased 20.9% year-over-year to $ 276.73 million. Its cash and cash equivalents are down 31% from their value a year ago to $ 946.09 million for the nine months ended June 30, 2021. In addition, the share price has declined by around 4% in the past six months and more than 8% in the past month.
TOL’s weak fundamentals are reflected in its POWR ratings. The stock also has a D rating for Momentum and a C for Growth and Value. In the home builder industry, it is ranked # 15.
In addition to the POWR ratings I just outlined, the TOLL rating can be seen for feeling, stability, and quality here.
Knowledge base home (KBH)
KBH is a United States home construction company. Western coast; South West ; Central; and the Southeast are the four operating segments of the Los Angeles-based company. It is primarily aimed at active adult first-time, first-time and second-time home buyers. In addition, the company offers financial services, such as insurance products and title services.
In its final quarter, the company’s deliveries were severely impacted by persistent supply chain issues and industry-wide labor shortages.
KBH’s cash and cash equivalents decreased 48.6% year-on-year to $ 350.14 million for the nine months ended August 31, 2021. Its interest income fell 81.7% year-on-year year to $ 144,000 for the three months ended August 31, 2021. In addition, the company’s property income was $ 248,000 for the quarter, compared to $ 16.04 million for the period of the year. former. The share price has fallen almost 3% in the past year and about 18% in the past six months.
KBH’s POWR ratings are consistent with this grim outlook. It has a D rating for momentum, quality and feeling. The stock is ranked No. 21 in the homebuilders industry.
Beyond the POWR ratings that I just highlighted, one can see the KBH ratings for value, stability and growth.
DHI stock was trading at $ 84.84 per share on Wednesday morning, up $ 1.12 (+ 1.34%). Year-to-date, DHI has gained 23.90%, compared to a 16.96% increase for the benchmark S&P 500 over the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college, she majored in finance and is currently pursuing the CFA program and is a Level II candidate. Following…