After highly benefitting from the pandemic boom in housing and home improvement over the last two years, homebuilder and building products stocks have seen adverse price action as of late. These companies posted record earnings and gross margins during this time, boosted by a surge in demand caused by decreased borrowing rates.  

Rising Rates

Mortgage rates are ticking back up over the last several weeks, with some locations now witnessing the 30-year fixed mortgage rate at 5%. This has caused mortgage payments to go up, driving down product demand and potentially steering away new applicants in the future.

It was widely known that mortgage rates would rise before the end of 2022, but the speed at which they have climbed has been a nasty surprise. To put it into perspective, on March 3rd, the 30-year fixed-rate mortgage average was at 3.76%; it’s now at 4.67% as of March 31^st and the highest it’s been since December 2018.

Generally, new home construction kicks off around springtime and continues throughout the summer months due to favorable weather patterns. Now, with increased rates, it is a possibility that the best season for these companies may be negatively affected.

Labor Market Strength

However, demand has been so strong that homebuilders say they have had little issue filling canceled contracts, web traffic levels have remained the same, and sales floors have remained packed. Additionally, the labor market has remained tight and the economy appears to be very strong.

ADP’s Employment Report on Wednesday was better than expected, reporting that 455,000 new jobs have been created in the private sector. Furthermore, the Bureau of Labor Statistics (BLS) released its new Employment Situation report this morning which showed that the unemployment rate declined to 3.6% from 3.8%, and the number of unemployed persons decreased by 318,000 to six million. Notable job gains continued in leisure and hospitality, professional and business services, retail trade, and manufacturing.

Clashing Viewpoints

So, this brings us to an interesting spot regarding the industry’s outlook for this year and next. Mortgage rates have spiked, signaling that demand may retrace, yet the labor market is robust, the Fed says that the economy is currently strong, and employees are making more money than ever. What now?

I think that it’s entirely too early to accurately forecast the future that stands before this industry, mainly due to the unexpected speed at which mortgage rates have risen over the last two weeks. However, with a tight labor market and the economy’s current strength, I think it’s worthwhile for investors to consider a few of these stocks for their portfolios.  

I’ve selected two names – Century Communities, Inc (CCS Quick QuoteCCS - Free Report) and Builders First Source, Inc (BLDR Quick QuoteBLDR - Free Report) – that would benefit from continued high demand in the homebuilding space and a strong economy. Both stocks boast a strong Zacks Rank, have low forward-earnings multiples, and have witnessed positive earnings estimate revisions over the last 60 days.

Century Communities, Inc

Century Communities (CCS Quick QuoteCCS - Free Report) is a home building and construction company that constructs, markets, and sells various single-family detached and attached residential home projects. Based in Colorado, the home-builder currently sports an enticingly low 3.1X forward earnings multiple, much lower than the industry’s 5.4X average.

Analysts have been upping their earnings estimates over the last 60 days. For the current and next year’s earnings, the consensus estimate trend has increased by 13% to $17.24 per share and 18% to $18.33 per share. The next quarter’s estimate has risen by 2% up to $4.16 per share, and the subsequent quarter’s has increased nearly 32% up to $3.92 per share.

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2021 Q4 revenue of $1.2 billion represented a sizable 26% jump from 2021 Q3. Revenue from its home sales, a vital line of business, increased 33% year-over-year from 2020 to 2021, and next year’s revenue forecast of $4.7 billion in this line of business reflects a 16% increase from 2021. Additionally, the current year’s overall revenue forecast of $5.1 billion represents a 15% increase year-over-year.

The home-builder has chained together nine consecutive earnings beats, and over the last four quarters, the average EPS surprise has been a notable 40%. Century Communities is currently a Zacks Rank #1 (Strong Buy).

Builders FirstSource, Inc

Builders FirstSource (BLDR Quick QuoteBLDR - Free Report) is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States. The company currently has a forward-earnings multiple of 7.3X, much lower and enticing than the Zacks Building Products - Retail Industry’s 15.2X average.

Over the last 60 days, the consensus estimate trend for the next quarter’s earnings has decreased slightly by 3.7% to $1.82 per share, but the subsequent quarter’s trend has skyrocketed 84% to $2.08 per share. Current year earnings estimates have risen nearly 30% to $8.90 per share, and next year’s estimate has climbed 33%, now reflecting full-year earnings of $9.23 per share.

Image Source: Zacks Investment Research

Opening up the balance sheet, we can see that the company’s top line surged 132% year-over-year from 2020 to 2021. During the same time, BLDR’s revenue from its lumber segment jumped 173%, windows and doors revenue climbed 105%, and manufactured products revenue increased 165%. Additionally, the Zacks Consensus Sales Estimate for the current year reflects year-over-year top-line growth of 2.3%.

Impressively, the company has chained together a streak of 14 consecutive quarterly EPS beats dating back to November 2018. BLDR smashed estimates by nearly 47% in its latest quarter and has acquired a four-quarter trailing average EPS surprise of 74%. BLDR is currently a Zacks Rank #1 (Strong Buy) with an overall VGM Score of an A.