First quarter results are in for the large publicly traded builders, and investors who were long on the stocks into the quarter were rewarded as the S&P Homebuilders ETF (XHB) gained 5.7% for the two-week period beginning April 21 (the first home builder earnings release date), compared with a 0.5% rise in the S&P 500. This adds to an already impressive run for the XHB, which is now up 33.8% for the year.
For the purpose of this article, I will be referring results posted by eight builders who report on a calendar year-end schedule: Century Communities (NYSE: CCS), D.R. Horton (NYSE: DHI), M.D.C. Holdings (NYSE: MDC), Meritage Homes (NYSE: MTH), NVR (NYSE:NVR), PulteGroup (NYSE: PHM), Taylor Morrison (NYSE: TMHC), and Tri Pointe Homes (NYSE: TPH).
Expectations were high coming into the quarter, and, for the most part, the home builders were able to deliver. A majority of the companies generated EPS ahead of consensus expectations, with CCS ($3.00 actual vs. $1.60e) and MTH ($3.44 actual vs.$2.46e) posting outsized earnings beats.
Home sales revenue increased 31% year over year on average, driven largely by a 26% increase in deliveries. Several builders actually fell short of Wall Street’s delivery expectations, citing supply chain disruptions and other issues that have caused cycle times to lengthen. Backlog conversion rates have come down materially across the industry since the start of the pandemic, a sign of both healthy demand and a stretched supply chain.
Despite rising costs on a number of fronts, home building gross margins expanded roughly 300 basis points on average in the quarter, as the industry continues to enjoy strong pricing power. Most builders posted gross margins well in excess of the traditional benchmark of 20%, and several guided to further margin expansion for the remainder of the year. Home builders were also successful in leveraging their non-build costs in the quarter, improving SG&A as a percent of home building revenue by an average of 145 basis points.
On the demand front, home sales on a per-community basis were up significantly in the quarter compared with last year, with the average being up 44%. Most builders indicated that the pace could have even been higher were it not for their own internal decisions to meter sales in an effort to manage their backlogs and implement price increases. Normally there is some disparity in sales activity between geographies or price points, but, based on the results from the quarter and commentary from management teams, it appears to be a seller’s market in just about every MSA and price point.
So, what are the main takeaways from the quarter? For the Bulls, it’s the strong year-over-year improvements in key operating metrics, the positive outlook for both margins and demand, and the continued shortage of inventory in both the new and existing home markets. For the Bears, it’s the belief that we are near the peak in terms of profit margins and order growth, that interest rates will eventually start to move higher, and that, ultimately, the home builders will find a way to screw this up, either through unrealistic land underwriting assumptions or overly aggressive pricing measures. The short sellers who have made that bet over the past year have been painfully wrong, and home builders’ performance this quarter did little to improve their case.