MI Homes ( NYSE: MHO).
- M I Homes is among the top ten homebuilding companies in the US.
- M I Homes has gained market share in the industry in the last two fiscals.
- The two-year forecast for the company looks promising.
- The company has improved its bottom line significantly in the last two years.
We retain a buy rating on M I Homes. Our buy rating is based on the market outlook for 2022 and 2023 and the analysis of the company on the following parameters.
Revenues and Net Income.
The Annual Revenue of the company has increased from USD 2.5 billion in 2019 to USD 3.745 billion in 2021 at a CAGR of 22.39 percent. The Net Income of the company has increased from USD 127 million to USD 396 million during the same period at a CAGR of 76.58 percent. The Net Income to Sales Ratio has increased from 5.08 percent in 2019 to 10.6 percent in 2021. Thus we can look forward to greater profitability in 2022, and 2023 because of improved efficiency of operations and economies of scale.
The Debt to Equity ratio of the company has declined from 0.69 in 2020 to 0.59 in 2021 because of an increase in retained earnings to the tune of USD 396 million. A lower debt-equity ratio is considered to be better for any business because of lower interest expenses.
MI Homes had a market share of 3 percent in the US Homebuilding market in 2021. The company’s market share has increased from 2.45 percent in 2019 to 3 percent in 2021. It was 2.78 percent in 2020. The overall market is estimated to shrink by about 2.2 percent in 2022 as compared to 2021. Assuming that the company continues to increase its market share at the current rate (10.66 percent CAGR), we can expect it to have a market share of 3.36 percent in 2022 and 3.73 percent in 2023. With this assumption, the revenue of the company in 2022 can be estimated at USD 3.998 billion (an estimated industry size of 118.9 billion USD in 2022), i.e. a 6.76 percent growth in revenue over the previous year.
Price to Earnings Ratio.
The Price to Earnings ratio of the company is 3.29 as of April 1st 2022. The Price to Earnings Ratio of the Homebuilding industry in January 2022 was 17.59 which is much higher than the company’s P/E. The Average TTM P/E of the company is 4.91 and the 3-year Average P/E of the company is 6.05. Thus there is an upside potential of 33.59 percent in terms of the Price Earnings ratio as compared to the Trailing Twelve Month’s P/E.
Price to Book Value.
The Price to Book value of the company as of 5th April 2022 is 0.81. The median P/B Ratio of the company is 1.087. Thus there is an upside potential of 25.5 percent in terms of the Price to Book value.
The current PEG Ratio of the company is 0.1. The industry PEG Ratio is 0.26. Thus there is a strong potential for an increase in the price of the shares in the next couple of years for the company to be fairly valued.
Return on Equity.
The RoE of the company for 2021 is 24.38 percent which is lower than the industry average of 27.38 percent.
Return on Inventory.
The Return on Inventory of M I Homes for 2021 is 20.758 percent as compared to 37.9 percent for D R Horton the industry leader. The Return on Inventory is calculated as the Ratio of Pre Tax Net Income and Average Inventory during the year.
Home Building Industry Outlook.
The outlook for the homebuilding industry remains favourable. The demand will continue to outstrip supply in 2022 just like the previous year. However, the demand may be slightly subdued as compared to 2021 because of an increase in home mortgage rates as well as an increase in the average cost of a house. According to Zillow the typical price of a house in the US today is USD 331,533. It has increased by 20.3 percent over the last year and is expected to increase by another 17.8 percent over the next twelve months. Thus, the average price of a middle-tier home is likely to reach USD 400,000 by April 2023. Home prices are expected to moderate in 2023. The Federal Reserve has increased the interest rate once this year and is likely to do so 6 more times in 2022. It is also likely to increase the rates three more times in 2023. Because of these two factors the market size of the home building industry is likely to shrink by 2.2 percent in 2022. Although the industry size is likely to shrink in 2022, we can expect M I Homes to capture a larger market share of up to 3.36 percent based on its current growth rate. Thus, the earnings are likely to increase to USD 3.998 billion in 2022.
The home building industry continues to suffer from labour and supply shortages, inflation and increasing costs of materials and labour. The company’s performance will also depend upon how it manages its investments in land and land development spending. Although interest rates continue to remain low as per historic standards, mortgage rates are expected to be high in 2022 and 2023 which will affect mortgage affordability and mortgage availability. The five-year forecasts for the homebuilding industry’s revenues show a declining trend.
Share Repurchase Program.
In February 2022, the company announced that its board of directors had authorised an additional 100 million USD worth of share repurchase. Thus, the total authorisation for share repurchase stands at 148.5 million USD. The company has not announced when the repurchase would take place and how it will be undertaken. The authorization has no expiration date and it could be modified or discontinued or suspended at any time at the company’s discretion.
M I Homes is likely to do well in 2022 and 2023 but the five-year forecast for the industry does not look promising because of which the company is also likely to suffer. However, investors can consider buying shares of the company from a two-year perspective. M I Homes seems very sincere about the quality of homes It offers to customers and if it can continue to increase its market share like in the previous two years, investors can look forward to a decent increase in the share price in the next couple of years.