The U.S. housing industry is well poised for 2022 as the market is witnessing solid demand despite ongoing supply-side bottlenecks. Despite the usually slower season for housing, continued supply, labor, and material woes, and new COVID variants, homebuilders are increasingly confident, thanks to solid demand and limited homes in inventory.
Per the latest data released by the Commerce Department on Jan 3, spending on construction activity inched up 0.4% in November 2021 from October’s revised reading. On a year-over-year basis, the metric increased 9.3%. Residential construction spending grew 0.9% from a month ago and 16.1% from the prior year. The upside was mainly attributable to increased spending on private projects like new single-family homes (up 1.2% from the previous month).
The latest construction spending data encourages the Zacks Building Products – Home Builders industry bellwethers like M.D.C. Holdings, Inc. MDC, KB Home KBH, Toll Brothers, Inc. TOL and D.R. Horton, Inc. DHI. This winning streak is likely to continue in 2022, given impressive unemployment data (which improved 0.3 percentage points to 3.9% in December 2021 from the previous month), lower mortgage rates, rising mortgage applications and increasing buyer traffic.
Based on various parameters, let’s check out whether MDC or KB Home is more appealing to investors. It is to be noted that both the companies are almost neck to neck in terms of market cap and carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MDC — having a market cap of more than $3.6 billion — engages in building and selling single-family detached homes for first-time and move-up buyers under the name “Richmond American Homes.”
The company’s Build-to-Order process, also known as “dirt sales”, provides buyers with a wide range of choices in major aspects of their future home and personalized customer experience through in-house community teams. MDC’s Financial Services operations offer mortgage loans, insurance coverage, and title agency services to its subsidiaries as well as customers in the United States.
Conversely, KB Home — with a market cap of almost $3.6 billion — offers a diverse range of new homes that are designed primarily for first-time, move-up and active adult homebuyers on acquired or developed lands. It also builds attached and detached single-family and town homes as well as condominiums.
The company has been benefiting from the Built-to-Order approach and Returns-Focused Growth Plan. With these initiatives, it emphasizes on core business strategy, improving asset efficiency, and monetizing significant deferred tax assets that further help it gain a competitive edge over its peers and reduce costs. Not only KBH’s customer-centric approach is encouraging, but also aggressive investments in land acquisition and development are set to drive growth. It has invested more than $6 billion in land acquisition and development since 2015 and plans to invest more going forward.
Strong Brand Presence & Customer Spectrum
Although MDC is a slightly bigger company than KB Home in terms of market cap, the latter has a broad spectrum of customers as it serves active adults along with entry-level and move-up buyers. Also, KB Home’s homebuilding segments build both attached and detached single-family homes, town homes as well as condominiums.
That said, both the companies’ customer-centric moves and investment in land acquisition and development are encouraging.
Prospects & Stock Performance
Despite intense inflationary pressure and persistent supply issues, the housing industry has been rallying on robust demand. Depending on the ability to yield higher profits amid headwinds, both the companies are expected to generate higher earnings.
For MDC, the Zacks Consensus Estimate for 2022 earnings indicates 17% year-over-year growth. KB Home’s bottom line for fiscal 2022 is likely to improve 33.6%. Meanwhile, KB Home has a VGM Score of A, while that of MDC is C.
Shares of MDC have gained 8% in the past six months compared with KB Home’s 3.6% growth. Both the stocks have underperformed the industry’s 6.5% growth in the same period.
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Undoubtedly, KB Home is a clear winner in terms of earnings growth expectation and VGM Score. However, MDC has impressed investors more than KB Home in the past six months.
A Look at Stocks’ Profitability & Valuation
Return on Equity in the trailing 12 months for MDC is 24.5% compared with KB Home and the industry’s 18% and 21.5%, respectively. Markedly, MDC provides more impressive returns to investors than KB Home and the industry.
The trailing 12-month price-to-earnings multiple for MDC and KB Home is 6.7 and 7.53, respectively, compared with 8.6 for the industry. Both MDC and KB Home’s shares are cheaper than the industry.
KB Home certainly has an edge over MDC in terms of brand name, customers and prospects. MDC is more attractive among investors as it provides better returns and is quite cheaper than the industry as a whole. Nonetheless, both the companies remain optimistic about overall homebuilding growth trends, given promising fundamentals and prospects.
A Brief Overview of the Other Two Stocks
D.R. Horton currently carries a Zacks Rank #2. This Texas-based prime homebuilder continues to gain from industry-leading market share, solid acquisition strategy, a well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.
D.R. Horton’s earnings are expected to rise 27.7% year over year in fiscal 2022.
Toll Brothers currently sports a Zacks Rank #1. This Horsham, PA-based luxury homebuilder builds single-family detached and attached home communities; master planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities, principally on the land it develops and improves. It has been benefiting from the strategy of broadening product lines, price points and geographies.
Toll Brothers’ earnings for fiscal 2022 are expected to rise 46.3% year over year.
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Toll Brothers Inc. (TOL): Free Stock Analysis Report
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