MHO - M/I Homes: Undervalued Despite High Growth And A Great Product

Summary

• M/I Homes tripled earnings in 5 years.
• Increasing new homes sales.
• Fully covered service.

M/I Homes (MHO) has experienced a negative trend for 2022 in line with the overall contraction in the housing market. MHO has seen a decline of 24.68% for 2022, which is comparable to the 22.17% loss in the Russell 2000.

However, the company has more than tripled earnings, as quantified by EBITDA, which is at $623.4 million for TTM compared to $182.6 million for 2018. While the stock price doesn’t seem to have tracked this improvement.

Since EPS has almost quadrupled over the same period. I read that the share price is lagging behind the increase in income. What attracts me the most is that the company has a start-to-finish product.

They can find financing for their customers, act as insurance brokers, and fully fit the house from top to bottom with furniture and decorations. The average home builder, from personal experience, doesn’t go beyond the kitchen and bathroom.

Let’s have a closer look at this home builder, which I particularly like. I see MHO as undervalued considering the past 5 years of increased incomes and lack of stock price performance.

Industry Trend

The housing market is not going through a great time at the moment and is likely to suffer further into 2023. The main reason for the decline in home sales and price increases has been the tightening monetary policy from the Fed.

This brings the question, should we even have a Fed? As the answer is beyond the scope of the article let’s get back to the market trends. We have seen a decline in 2022 for existing home sales . From January 2022 to October 2022, sales fell from 6,500 to 4,090 per month.

That equals a decline of 37%. The chart below shows the general decline in new home sales also throughout 2022. However, new home sales have been on the rise for October and November 2022. The reason might be that the market is adapting to the new environment or there may be fewer existing homes for sale .

Something that would help the housing market is the Fed flattening its monetary policy. I mean keeping interest rates at a set level for a prolonged period. A stable rate environment, or one where the perception is we have reached a ceiling, may help bring more home buyers and sellers to the market.

2008 Comparison

Many may be wondering if we are heading into another real estate bubble like the one experienced in 2008. I really doubt it. The main reason that the real estate bubble inflated, and burst, was basically due to the administration's push to get everyone a mortgage whether they could pay for it or not.

It’s a simplistic analysis of what happened, of course, there were more factors coming into play. But that factor is the catalyst of everything else. As we are no longer under the easy lending scam perpetrated back then, I doubt there is any bubble to burst.

The chart above shows the Shiller Home Price Index for the past 25 years. We can see we are clearly in a down trend. But house prices in the 20 metropolitan areas tracked still grew by 8.6% in October 2022.

I believe we are still very far away from a housing crisis. Although house price increases may slow down, I find it hard to see house prices actually falling.

M/I Homes Fundamentals

M/I Homes has delivered substantial earnings growth over the past 5 years. EBITDA has risen steadily from 2018 to 2022, from $182.6 million to $623.4 million. Not even the adverse effects of the pandemic mandates knocked earnings off course.

MHO multiplied its earnings by 3.4 from 2018 to 2020, yet the stock price opened in 2018 at $34.84 and closed in 2022 at $46.18. Of course, there are more factors at play than earnings, but I still believe this stock has underperformed over the mentioned period.

The company has a liabilities to assets ratio of 0.46, which shows solid capitalization and is in line with direct competitors such as Century Communities ( CCS ), which has a ratio of 0.466.

Another ratio that has performed particularly well over the past 5 years is EPS. From 2018 to 2022, MHO has multiplied EPS by 296%. Again, the stock price for MHO hasn’t kept up with this metric either.

One point that does raise some concern is the small size of free cash flow. The company had a negative free cash flow for 2021, that situation seems to be corrected even if marginally. The company also went from a cash flow of $168.3 million in 2020 to just $3.4 million in 2022.

Presumably, they have this back under control and the situation may be due to external factors that are not within the management's hands. However, I see the price target for M/I homes at $68.18, for which it would need to maintain its earnings in 2023.

Quant Rating

The Quant rating for MHO is a Strong Buy. With only one factor grade, Growth, getting a C-. Having a closer look at the metrics within this factor we see that the lagging performance is due to Forward Revenue Growth.

Forward revenue growth has a D- rating and is comparably lower than the sector median. In fact, the average for MHO is 90.32% lower than the sector median. That seems a lot. However, EBITDA Growth YoY is currently at 25.29% and that’s 386.38% higher than the sector average.

M/I Homes Technical Analysis

Let’s take a look at the technical analysis of MHO. This stock has seen some spectacular price moves. So, owners of this stock should make sure they are ready for a bumpy ride. Looking at the 1-month chart we can see that price action is still in a clear bull trend.

Price has drifted closer to the cloud again and that should offer some support. The market has tried to break below the cloud on the monthly chart on 4 occasions. In each attempt, the break was rejected. That's an indication of the strength of the bulls over the bears.

You may notice the two-candle dip below the cloud, but that retracement was not confirmed as the lagging line (green line) didn’t break below the cloud. From a technical viewpoint, this stock is in a long-term trend, and it may be finding support as price action gets close to the cloud.

More bullish indication comes from the RSI indicator. The monthly RSI has also just crossed above its 14-month moving average indicating a return to upward momentum. And on the retracements in price the RSI never got anywhere near the level of 30.

Short-Term View

Here the short-term view for M/I Homes is rather mixed. The chart below shows the weekly price action for MHO. The current candle has crossed above a major resistance line (black line) showing bullish momentum. However, this week the stock would have to close above that line for confirmation of further highs.

The market is still below the Ichimoku cloud, a bearish indication. But moving averages (blue and crimson lines) show momentum to the upside. For confirmation that the long-term bullish trend is back on track, we need to see price close above the blue line, which is a major resistance line.

That area is also a resistance zone on the Ichimoku system, as it is on the top side of the cloud. Confirmation would be complete once the lagging line (green line) is also above the cloud.

The daily chart below shows a bullish short-term trend in action. Price action crossed above the cloud in early November last year and has continued to trend higher. All other components of the system also confirm the bullish trend.

Price today broke above the black resistance line found on the daily and weekly charts. A close on the day chart would confirm a bullish trend over the next 2 weeks. The RSI is also above its moving average and trending higher.

Conclusion

The biggest concern for homebuilder stocks is the continued squeeze in interest rates and a shrinking housing market. I presume that’s why despite an increase in the company’s performance the stock price declined for 2022.

That said, I believe the housing market may continue to slow down. However, I strongly doubt that there will be a housing market crisis. Interest rates should settle and remain at the same level from mid-2023.

At least that is what the Fed Funds futures market believes. FF futures traders see a 0.25% hike as likely at the next two meetings. And then the probability of further hikes diminishes until eventually rate cuts are expected.

So, my view on the housing market, and the quality of the products and services offered by M/I homes greatly influences my bullish sentiment on this stock. Our Quant rating also ratifies my choice. And so does my model that factors EBITDA, FCF, and liabilities to assets.

For further details see: