M/I Homes, Inc. MHO is scheduled to report third-quarter 2024 results on Oct. 30, 2024, before market open.

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This Columbus, OH-based homebuilder reported a strong second-quarter 2024, marked by record-setting revenue and earnings. The company achieved total revenues of $1.1 billion, surpassing the Zacks Consensus Estimate by 5% and increasing 9.4% from a year ago. Earnings per share (EPS) came in at $5.12, surpassing expectations by 52 cents and increasing 24.3% year over year, showcasing the company’s profitability even in a challenging economic environment.

The company’s margins also saw significant improvement, with a gross margin reaching 27.9%, up by 240 basis points (bps) from the previous year. M/I Homes delivered 2,224 home closings, a 12% increase from last year.

This homebuilding company’s earnings topped the consensus mark in three of the trailing four quarters and missed on the remaining occasion, the average surprise being 4.8%.

How Are Estimates Placed for MHO?

The Zacks Consensus Estimate for the third-quarter EPS has increased over the past 60 days as shown in the chart below.

The estimated figure indicates a 2.5% increase from the year-ago EPS of $4.82. Also, the consensus mark for revenues is $1.13 billion, indicating 7.74% year-over-year growth.

Image Source: Zacks Investment Research

What the Zacks Model Unveils for MHO

Our proven model does not predict an earnings beat for M/I Homes for the quarter to be reported. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Earnings ESP: MHO has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: The company currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Major Factors to Impact M/I Homes’ Q3 Performance

Despite challenging affordability conditions due to higher mortgage rates, M/I Homes' third-quarter earnings and net sales are likely to have increased year over year due to strong demand for entry-level and first-move-up homes. The lack of existing homes for sale is likely to have boosted the top line. MHO's focus on single-family homes and attached townhomes for various buyer segments, including first-time, millennial, move-up, empty-nester and luxury buyers, is likely to have driven growth.

The company’s diverse geographic presence across high-demand markets, such as Texas, Florida, and North Carolina, will also allow 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 in the to-be-reported quarter. Along with that, the Smart Series — M/I Homes' most affordable product line (which accounted for 53% of new contracts in the second quarter) — is likely to have helped the company cater to a broader market.

Also, improved construction cycle time and solid land acquisitions and development strategy are likely to have helped it partially offset the ongoing macro challenges.

The Zacks Consensus Estimate for Housing revenues (which contributed 96.6% to total revenues in the second quarter) of $1,098 million suggests a rise from $1,008 million reported a year ago.

The consensus mark for homes delivered is pegged at 2,263 units, indicating a rise from 2,096 units a year ago. The same for the average home closing price is likely to be $478,000, suggesting a drop from $481,000 reported a year ago.

The Zacks Consensus Estimate for new contracts is pegged at 2,125 homes, implying a slight increase from 2,021 homes reported a year ago.

The Zacks Consensus Estimate for backlog is pinned at 3,284 homes, suggesting a drop from 3,433 homes reported in the prior year.

The same for Financial Services (which contributed 2.8% to total revenues in the second quarter) revenues is pinned at $27.4 million, suggesting a rise from the year-ago level of $14.4 million.

From the perspective of the margins, improved construction cycle time is expected to have boosted the company’s third-quarter gross margins. Any continued stabilization in material costs, such as lumber, would further support margins.

However, higher material and labor costs, along with uncertain economic conditions, are likely to have negatively impacted operations and hurt margins in the to-be-reported quarter. Elevated selling expenses and greater headcount and incentive compensation are anticipated to have strained MHO's profitability.

With increased community counts and a higher headcount, SG&A expenses are expected to have remained at a similar level to the second quarter, around 11% of revenue. This aligns with the company’s strategy to control costs while managing expansion.

MHO’s Price Performance & Premium Valuation

M/I Homes stock has gained 14.2% so far this year, underperforming the Zacks Building Products - Home Builders industry. The stock also underperformed the industry and the S&P 500 Index.

Yet, company has performed better that Tri Pointe Homes, Inc. TPH, Dream Finders Homes, Inc. DFH and Century Communities, Inc. CCS during the same period.

YTD Share Performance

Image Source: Zacks Investment Research

Let's assess the value MHO stock offers to investors at its current levels.

Presently, MHO is trading at a discount compared to the industry average, as shown in the chart below.

Image Source: Zacks Investment Research

How to Play MHO Stock Now?

M/I Homes is cautiously optimistic about the third quarter of 2024. It expects to sustain momentum through strategic incentives, controlled inventory levels, and expansion in high-growth regions. With a robust financial position and demand for affordable housing, the company is well-positioned to navigate challenges.

However, 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.

Also, below-market financing incentives can pressure margins in the second half of the year. The rising land acquisition and development costs, while necessary for growth, can also erode margins if not offset by higher home prices or greater efficiencies.

Potential new investors might consider waiting for more clarity on how this company handles these challenges and navigates the broader economic landscape before making new investment decisions.

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