M/I Homes, Inc. (MHO – Free Report) is benefiting from offering housing incentives to address the affordability concerns of homebuyers, along with a diversified customer base and geographical presence. Apart from ensuring business growth, the company also leans toward rewarding its shareholders by maintaining a balanced capital allocation approach.
This Ohio-based homebuilder has gained 12.5% in the past six months, outperforming the Zacks Building Products – Home Builders industry, Zacks Construction sector and the S&P 500 Index. The detailed price performance is shown in the chart below. The ongoing optimism surrounding the Fed rate cuts, improving job environment and homebuyers adjusting to the new average mortgage rate standard (around 6% on average) is expected to boost the United States housing market, thus fostering MHO’s prospects through 2025.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate of the company’s 2025 earnings per share (EPS) has moved south to $20.42 from $20.76 in the past 60 days. However, the estimated value indicates 3% year-over-year growth. Furthermore, earnings estimates for the upcoming fourth quarter of 2024 also indicate 32% year-over-year growth. The growth prospect is further solidified by a VGM Score of B, backed by a Value Score of A and a Momentum Score of B. The positive trend signifies bullish analysts’ sentiments, robust fundamentals and the prospects of an outperformance in the near term.
However, persisting sticky inflation, coupled with the high costs and expenses incurred by the company to ensure smooth sales trends, is limiting its prospects to some extent.
Let us discuss the factors why investors must retain this Zacks Rank #3 (Hold) stock for now.
Factors Ensuring MHO Stock’s Upward Momentum
Diversified Customer Base & Market Presence: M/I Homes operates across 17 markets in the United States, serving a diversified customer base including first-time, move-up and active adult buyers. First-time buyers represented 50% of the company’s third-quarter 2024 sales, reflecting strength in its favorable product offerings and product mix. At the end of Sept. 30, 2024, MHO’s community count increased year over year to 217 from 204, with 88 in the northern region and 129 in the southern region.
Regarding geographical presence, the company’s diversified market reach also plays an important role in boosting sales and managing product offerings. It has been thriving across high-demand markets including Ohio, Minnesota, Michigan, Florida, Illinois and North Carolina. Backed by the macro tailwinds, M/I Homes believes that such a diverse mix is expected to boost its sales and new contracts in the upcoming period.
Ensuring Affordability: M/I Homes indulges in offering various sales incentives and product offerings that counter the affordability issues for potential homebuyers in the market. The constant tug-of-war between owning a house and batting out high borrowing costs is affecting homebuyers’ spending tendencies, despite macro tailwinds offering relief to some extent. The company’s efforts to offer affordable products and sales incentives are fostering its sales volume despite the ongoing inflation and a still high mortgage rate scenario.
The company promotes its sales by offering a mortgage rate buy-down program and its Smart Series line of homes consisting of single-family products and townhouse products. During the third quarter of 2024, about one-third of its buyers used its buy-down program and indulged in purchasing houses from its Smart Series product line (contributing 50% to third-quarter sales).
Rewarding Shareholders: Through a balanced capital allocation strategy, MHO has been ensuring shareholder value along with investing the free cash flow for business enhancement activities. During the first nine months of 2024, the company returned $125.8 million to its shareholders by repurchasing 0.9 million shares under its 2021 and 2024 Share Repurchase Programs.
Furthermore, the company’s trailing 12-month return on equity (ROE) is indicative of its growth potential and focus on maintaining shareholder value. Its ROE of 19.9% compares favorably with the industry’s 15.8%, indicating more efficiency in using shareholders’ funds than peers.
What’s Restricting M/I Homes’ Growth?
The company has been incurring certain expenses and costs because of increased sales incentive offerings, land investments, and association with its sales offices and models due to the increased community count. In the first nine months of 2024, MHO’s selling, general and administrative expenses increased year over year to $360 million from $317.2 million. The still high mortgage rate and sticky inflation are likely to have been hurting its growth prospects, which are expected to linger for some time in the upcoming period.
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