The U.S. homebuilding industry got more good news late last
month amid reports that new single-family home sales in November
reached their fastest pace in two-and-a-half years.
According to data from the Commerce Department, November sales
rose 4.4% from the prior month and 15% from the prior year to a
seasonally adjusted annual rate of 377,000 units.
It was the highest rate of new-home sales since April 2010,
when the industry benefited from a temporary $8,000 tax credit
for homebuyers.
The news continued a months-long rebound in the industry that
has been driven by record low mortgage rates as well as a decline
in unemployment and foreclosures.
Stock Rally
Publicly traded homebuilders have rallied as well. The 18
stocks in IBD's residential building group are up more than 20%
since the entire sector slumped on July 19.
Some stocks, includingMI Homes (
MHO
), have risen at an even faster rate. MI shares have gained 62%
since July 19 thanks to a sharp turnaround in its financial
fortunes.
MI Homes is the nation's 16th-largest homebuilder with 128
active communities in the Midwest, mid-Atlantic and South, as of
Sept. 30.
The company builds homes for a wide range of customers in 13
metro areas, including Chicago, Houston, Indianapolis,
Cincinnati, Tampa, Fla., and Charlotte, N.C. It primarily caters
to first-time and move-up buyers.
"Their footprint is a little different than a lot of other
large homebuilders," said Joel Locker, an analyst at FBN
Research. "They don't build out West in the go-go markets like
Phoenix, Las Vegas and California. The Midwest is not as sexy as
the Western markets, but the affordability there is truly
affordable. It's more of a steady market."
MI's markets finally began to stabilize in 2012, helping the
company rebound from a severe financial pounding that began in
2007 and continued through 2011. The company absorbed huge losses
each of those years and watched its stock price plunge below 5 in
March 2009.
MI moved back into profitability during the second quarter of
2012. It also turned a profit during the third quarter.
The company's return to profitability lagged builders such
asLennar (
LEN
) andD.R. Horton (
DHI
), both of which finished 2010 in the black. But MI's performance
compares favorably to builders such asBeazer Homes (
BZH
) andKB Home (
KBH
), each of which continued to lose money in 2012.
Meanwhile, MI has run off five straight quarters of
accelerated revenue growth. The top line has grown in double
digits each of the last three quarters.
The company posted third-quarter revenue of $209 million, up
47% from the prior year. Earnings were 42 cents a share vs. a
loss of 25 cents a year earlier.
MI reported 757 new contracts to build homes during the
quarter, a gain of 29% from the prior year. Homes delivered were
746 compared to 582 the previous year.
The company's backlog of homes had a sales value of $334
million and an average sale price of $284,000 as of Sept. 30.
That compares to a backlog sales value of $223 million and an
average sale price of $266,000 a year earlier.
"Our third-quarter results represent our best quarterly
performance in five years and position us to return to full-year
profitability," Chief Executive Robert Schottenstein said in a
statement. "We are making meaningful progress on a number of
important fronts as housing conditions throughout most of our
markets have improved."
The improved financial performance played a big part in
Standard & Poor's late November decision to raise its outlook
on MI to positive from stable.
"The outlook revision reflects MI Homes' faster-than-expected
return to profitability, driven by improved margins on new
communities and a faster sales pace in all markets from a
relatively firmer overall housing environment," Standard &
Poor's said in a report.
The report also said MI's "strategy to expand community count
in its better-performing markets will result in stronger credit
metrics through greater operating leverage."
At the same time, Standard & Poor's affirmed its "B-"
corporate credit rating as well as its existing debt ratings on
MI.
Risk Profile
Those ratings reflect MI's "aggressive financial risk profile,
marked by improving but still weak EBITDA-based credit metrics.
We characterize MI Homes' business risk profile as 'vulnerable,'
given (its) comparatively smaller platform and current
concentration in certain weaker Midwest housing markets."
FBN's Locker is among those who believe homebuilders still
have more problems to deal with, despite the sector's recent
rebound.
"It's almost like a perfect world for builders in terms of low
mortgage rates, but there's still a lot of shadow inventory out
there," Locker said. "In addition, housing in general is the most
subsidized sector in the world. Once you subsidize it so much,
you put a price ceiling on it. There are still a lot of question
marks surrounding the sector."
In the near term, however, the outlook looks pretty strong for
MI. Analysts polled by Thomson Reuters expect the company to
report full-year 2012 earnings of 61 cents a share. They see
profit rising to $1.45 a share in 2013.