We first recommended Century Communities (CCS) in July 2016, and followed up with a recommendation in August 2018; both selections have worked out, with price appreciation (including dividends) of 258.5% and 114.5%, respectively, notes Doug Gerlach, editor of SmallCap Informer.
But the growth story isn’t over for this entry-level homebuilder. Many investors remain fearful of investing in the residential construction industry, but a closer look shows that the boom in single home housing still has plenty of room to run. At its current valuation, Century Communities represents an opportunity for long-term returns that is worth considering.
Founded in 2002, Colorado-based Century Communities is a builder of single-family homes and townhomes in 40 select major metropolitan markets in 17 states in the West, Southwest, South, and Midwest areas of the U.S.
The company is engaged in all aspects of homebuilding, including the acquisition and development of land and the construction, marketing, and sale of homes. It also offers title, insurance, and financing services in some of its markets.
Entry-level buyers represent around 80% of sales. Communities are typically built outside the most expensive areas of busy metropolitan areas.
Since 2012, Century Communities has grown total revenues at an average annualized rate of 55.0%, and EPS at a 35.6%. In Century’s third quarter ended September 30, 2021, revenues increased 20.6% to $958.0 million, a quarterly record, while EPS jumped 123.6% to $3.31, continuing to benefit from pandemic-influenced trends. Homes delivered were a third quarter record of 2,322, and gross home building margins increased to 25.7%.
The company’s backlog at quarter-end was 4,866 homes valued at $1.9 billion. Nearly 10,000 net new lots were secured, with Century’s total lots reaching a company-record 75,537 lots.
While rising interest rates will push up mortgage rates, rates will remain at historically low levels, and the prospect of increasing rates may drive many first-time buyers to buy sooner than later. Home prices are expected to increase in 2022, but not as severely as residential rents. With rental vacancies lower than average, many renters will be looking to buy.
Century Communities is well-poised to benefit from these trends. Analysts who follow the company see revenues of $4.2 billion and EPS of $14.02 in fiscal 2021, and $4.79 billion in revenues and $15.45 in EPS for fiscal 2022.
The consensus five-year EPS growth rate estimate for the company is just 9.0%, but sales are projected at 25.2% a year over the next two. We see the analysts’ EPS growth expectations as conservative, but will stick with their 9% growth projections in our analysis.
The current trailing P/E is 5.1, and the stock has traded at a high P/E of 6.8 and a low P/E of 3.8 in the last twelve months. The industry rarely commands high multiples, and hesitance about investing in a cyclical industry that has been on a boom for several years is likely holding back prices. For long-term investors, though, the likelihood of fundamental growth makes price looks right.
With five-year projected EPS of $19.23 and a future high P/E of 9.0, our future high price is $173. On the downside, a low P/E of 4.3 times 12-month trailing EPS of $12.50 results in a future low price of $54. The stock is a buy up to $84, with a 11.8:1 upside/downside ratio and potential annual return of 22.9% over the next five years.
