Century Communities shares remain a buy (NYSE:CCS)

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Prelude

Investing in the stock market is risky, and investing in individual stocks is even more dangerous. However, if we buy the shares of a company that operates in a sector that will suffer considerably from a recession, we need to be sure of what we buy and be prepared for high volatility. But for those with the courage and wisdom to ride out the storm, the ultimate reward can be rewarding all the hard work.

Quarterly results

Wednesday, Century Communities, Inc. (NYSE: CCS) reported results for the last quarter that exceeded analysts’ expectations. Analysts expected revenue of $1.1 billion and EPS of 4.47; instead, the company reported revenue of $1.2 billion (including $1.1 billion from home sales) and EPS of 4.78. Additionally, ROE improved by 610 basis points to 33.7%, a company record.

revenue

10-Q

Revenue from home sales increased by 13%. This increase is mainly attributable to the growth in the average sale price of homes in Q2, which reached $418,000, up 15% compared to the previous year. Backlog at the end of the quarter consisted of 4,767 homes sold for a value of $2 billion, up 7% and 12% from the prior year.

Century Communities invested $35.9 million to repurchase 790,558 common shares during the quarter, leaving approximately 2 million shares available for repurchase. In the first quarter of this year, the company invested $62.4 million to repurchase 1,13,387 common shares. These share buybacks reduced the number of shares by more than 5%.

The problems

Continued interest rate hikes prompted by the Fed have had a significant impact on homebuilders. 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 observed with a slowdown in the housing market due to of rising interest rates. CCS reported a sharp drop in net new homes to 2,233, compared to the previous quarter when 2,944 net new homes were underwritten. Additionally, 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 guide’s 240-250 communities by the end of the year. However, the company will continue to monitor the market to see if it is profitable to open fewer communities than expected.

The net debt-to-equity ratio in the residential construction sector was 33.6%, compared to levels of 23% a year earlier. Investments in WIP inventory were a major contributor to the increase in net debt during the quarter. The company, however, has $819.5 million in total liquid assets, including $160.5 million in cash (the decrease in cash is mainly due to the redemption). Century also expects margins to decline in the next quarter of around 23% due to the return of market incentives. The incentives will not directly affect home prices, which will not be lowered in different communities, but will be used to help buyers pay closing costs or lower mortgage rates.

Tips

Due to the slowdown in the US housing market, the company revised its full-year home delivery forecast to 10,750 to 11,750 homes. The previous guidance planned to deliver between 11,500 and 12,500 houses. Additionally, since the company reaffirmed that full-year home sales revenue would be between $4.3 billion and $4.9 billion, this implies that the homes will be sold at a higher price than previously expected. .

conclusion

Century Communities is a company that is currently trading at historically low multiples, much like the entire homebuilding industry. However, one must ask whether this is a value trap or whether we are looking for an attractive opportunity instead. I am convinced of the second option for these reasons:

  1. The recession that will hit America may be severe, but not as severe as in 2008, and prices in the sector are very close to these levels. So I think investors are pricing in an overly pessimistic situation.
  2. Century Communities continues to report positive data for 2022. However, analysts expect revenue to decline 4% in 2023, which is too low to justify a current P/E of 3.3. Additionally, the company is on a buyout campaign and will likely continue through 2023.
  3. Among the homebuilders who will suffer the most will be those selling high-priced homes to consumers who want to move into a bigger home. This is not the case with Century Communities, which sells first-time buyers. How many years can a person decide not to take a house and have a family? CCS sells a need, something that cannot be abandoned for long, even for very high interest.

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