- Century Communities quarterly results were positive, but future prospects are not great.
- Century Communities has continued to pursue its buyback program and reaffirmed the guidance.
- The market is pricing the effects of a recession too negatively.
Prelude
Investing in the stock market is risky, and investing in individual stocks is even more dangerous. However, if we buy the stock of a company that operates in a sector that will suffer significantly from a recession , we need to be sure of what we are buying and be prepared for high volatility. But for those with the courage and wisdom to ride out the storm, the ultimate reward can repay all the efforts faced.
Quarterly results
On Wednesday, Century Communities, Inc. ( CCS ) released results for the latest quarter that exceeded analysts' expectations. Analysts were expecting revenues of $1.1 billion and an EPS of 4.47; the company instead reported revenues of $1.2 billion (including $1.1 billion from home sales) and an EPS of 4.78. In addition, ROE improved by 610 basis points to 33.7%, a record for the company.
Revenues from the sale of houses increased by 13%. Driving this increase was mainly the growth in the average selling price of homes in Q2, which reached $418,000, up 15% from the previous year. The order book at the end of the quarter consisted of 4,767 houses sold worth $2 billion, up 7% and 12% from the previous year.
Century Communities invested $35.9 million to repurchase 790,558 shares of common stock during the quarter, leaving about 2 million shares available for repurchase. In the first quarter of this year, the company invested $62.4 million to repurchase 1,13,387 shares of common stock. These share repurchases reduced the number of shares by more than 5%.
The problems
The continued interest rate hikes brought about by the Fed have significantly impacted home builders. Although CCS recorded an increase in cancellation rates to 19%, this is still lower than the 26% cancellation rates recorded in 2018 and 2019, when a similar situation was seen with a slowdown in the housing market due to rising interest rates. CCS reported a sharp decline in net new homes to 2233, compared to the previous quarter when 2,944 net new homes were underwritten. In addition, Century reports that the total number of communities at the end of the quarter was 213 and that they should still be able to reach the guidance's 240-250 communities by the end of the year. However, the company will continue to monitor the market to see if it pays to open fewer communities than planned.
The ratio of net debt to equity in the residential construction sector was 33.6% compared to the previous year's levels of 23%. Investments in WIP inventories largely drove the increase in net debt during the quarter. The company, however, has $819.5 million in total liquidity, of which $160.5 million is in cash (the decrease in cash is mainly due to the buyback). Century also expects margins to drop in the next quarter, falling around 23% due to the return of incentives to the market. The incentives will not directly affect home prices, which will not be lowered in the various communities but will be used to help buyers with closing costs or to lower mortgage rates.
Guidance
Due to the slowdown in the U.S. housing market, the company has revised its forecast for full-year home delivery to 10,750 to 11,750 homes. The previous guidance, the forecast was to deliver between 11,500 and 12,500 houses. In addition, since the company reaffirmed that full-year home sales revenues would be between $4.3 billion and $4.9 billion, this implies that homes will be sold at a higher price than previously budgeted.
Conclusions
Century Communities is a company that trades at historically low multiples right now, as does the entire homebuilder sector. One must ask, however, whether this is a value trap or whether we are looking at an attractive opportunity instead. I am convinced of the second option for these reasons:
- The recession that will hit America may be strong, but not as strong as 2008, and prices in the sector are very close to those levels. So I think investors are pricing in an overly pessimistic situation.
- Century Communities continues to report positive data for 2022. However, analysts expect revenues to decline 4% in 2023, which is too low to justify a current P/E of 3.3. In addition, the company is conducting a buyback campaign and will likely continue through 2023.
- Among home builders who will suffer the most will be those who sell high-priced homes to consumers who want to move to a larger home. This is not the case for Century Communities, which sells first-time buyers' homes. How many years can a person decide not to take a house and have a family? CCS sells a need, something that cannot be given up for long, even for very high interest.
For further details see:
Present Is Good, The Future Less So: However, Century Communities Remains A Buy