M/I Homes, Inc. MHO stock has been rallying of late, gaining 36.8% over the past three months. This Scottsdale, AZ-based company’s shares have also performed better than the Zacks Building Products - Home Builders industry’s 29.4% rise. The stock has fared better than the Zacks Construction sector and the S&P 500 Index’s 18.9% and 1.4% rallies, respectively, over the same time frame.
This growth reflects this Columbus, OH-based homebuilder’s ability to meet sustained demand, despite broader economic challenges like rising interest rates.
Three-Months Performance
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The stock is currently trading above both its 50-day and 200-day moving averages, indicating strong investor confidence and a favorable market outlook.
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Factors Fueling MHO Stock Surge
M/I Homes serves a broad segment of the housing market including first-time, move-up, luxury and empty-nester buyers. Despite economic uncertainties, the company saw steady demand, particularly among millennials and Gen Z buyers seeking homeownership. This demographic shift continues to be a strong tailwind for M/I Homes. Its diverse geographic presence across high-demand markets, such as Texas, Florida, and North Carolina, also allowed it to capitalize on regional growth trends. M/I Homes expects to continue offering below-market financing, particularly for spec homes. This strategy will help the company to maintain strong sales volume throughout the year.
The Smart Series, M/I Homes' most affordable product line, contributed significantly and accounted for 53% of second-quarter sales. This focus on affordability helps the company cater to a broader market.
The company’s strategic land acquisition and control, with 23,000 owned lots and 49,000 controlled lots, provide a robust foundation for future growth. M/I Homes has a three-year lot supply, indicating a solid position for continued expansion. M/I Homes has a strong balance sheet with low debt levels, enabling strategic land acquisitions. Notably, the company ended the second quarter with $837 million in cash and no borrowings under its revolving credit facility.
Despite the rising costs in land development, the company’s ability to increase the number of communities and efficient management of cycle times contribute positively to margin sustainability. The company plans to open more communities in the second half of 2024, with 5% growth in community count projected for 2024.
The company’s shareholder equity rose 19%, reaching $2.7 billion in the second quarter, which reflects prudent capital management and the successful execution of its stock repurchase program, boosting shareholder value.
What May Pull Back M/I Homes?
The homebuilding industry, including M/I Homes, continues to face challenges due to rising labor and material costs. Despite efforts to streamline operations and enhance efficiency, these escalating costs remain a significant obstacle for the company.
One of the most significant challenges is the broader economic uncertainty. High mortgage rates have made homeownership less affordable, causing potential buyers to hesitate or delay purchases. While M/I Homes managed to achieve strong results in the second quarter, the company acknowledged a slight decline in both traffic and demand compared to the first quarter.
To combat this challenge, M/I Homes is offering below-market financing incentives, particularly for spec homes that can be delivered quickly (within 60 days). This approach may continue to pressure margins in the second half of the year as the company uses incentives to maintain sales momentum.
The company's land acquisition and development costs increased significantly. Land purchases rose from $96 million to $119 million, and development spending jumped to $144.5 million from $108.9 million a year ago. These rising costs, while necessary for growth, can erode margins if not offset by higher home prices or greater efficiencies.
MHO Stock Trading at a Discount
MHO stock is currently undervalued compared to its industry, as shown in the chart below. Yet, the company is trading currently at a discount compared to Tri Pointe Homes, Inc. TPH, Dream Finders Homes, Inc. DFH and Century Communities, Inc. CCS. TPH, DFH and CCS are trading with forward 12-month P/E multiples of 8.82, 10.51 and 8.13, respectively. Presently, MHO holds a Value Score of A.
MHO’s trailing 12-month return on equity of 20.5% is also better than its industry average of 18.3%.
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Estimate Revision Favoring the MHO Stock
It is also witnessing northbound estimate revisions for 2024 earnings per share (EPS). The estimated figure indicates 21.9% growth for 2024.
The company surpassed earnings estimates in three of the trailing four quarters and missed on one occasion, with the average earnings surprise being 4.8%.
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Buy, Sell, or Hold MHO Stock?
While M/I Homes continues to perform strongly, the challenges it faces — rising interest rates, increased inventory, affordability concerns, and land costs — pose potential risks to its future performance. The company’s strategic initiatives, including its focus on affordable housing, strong land position, and operational efficiency, will help mitigate some of these challenges, but economic factors outside of its control remain a key risk.
Potential new investors might consider waiting for more clarity on how this Zacks Rank #3 (Hold) company handles these challenges and navigates the broader economic landscape before making new investment decisions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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