“We are confident our positive trajectory will continue as not only did our fourth quarter net new contracts increase 45% over last year but we have seen our sales pace accelerate, with December up 54% and January increasing 77%. We are solidly positioned with a backlog of 3,439 sold homes, an increase of 66%, along with nearly 50,000 owned and controlled lots which will support further increases in deliveries, contracts and community count…”Century Communities Fourth Quarter and Full Year 2020 Results, February 4, 2021
With the above statement, mid-size home builder Century Communities (CCS) declared that the business of building and selling homes was strong as ever and getting even stronger. Moreover, the company has sufficient capacity to deliver the homes needed to satisfy the robust market demand. This confidence and bullish outlook earned CCS a 19.5% post-earnings gain and a breakout to an all-time high.
The news also helped reignite the home builder trade with fresh momentum across home builders. The iShares U.S. Home Construction ETF (ITB) gained 2.8% and is still printing all-time highs.
Century Communities’s results were truly impressive. The following table presents key year-over-year highlights from the earnings presentation:
|Land (lot count)||28%||7%|
Century Communities set company records with each performance measure as it continues to focus on the affordable, entry-level market (about 80% of deliveries). Moreover, the company recorded its 18th straight year of profitability. Improved pricing power “across markets” drove gross margin gains in the fourth quarter and January. Sequential margin gains are on an 8-month streak. However, Century Communities does not anticipate ASPs returning to 2019 levels. Year-over-year order growth in December increased 54% and January beat that growth with 77%.
Forward-looking guidance carried over the strength from 2020 and reflects expectations for a “favorable” Spring selling season and rest-of-year. From the Seeking Alpha transcript of the earnings conference call:
- Deliveries for 2021 from 10,500 to 11,500 homes or 11% to 22% year-over-year growth.
- Home sales revenue for 2021 from $3.3B to $3.8B or 10% to 27% year-over-year growth.
- Gross margins 20-21% in Q1 and Q2 which brackets 2020’s gross margin of 20.8%.
Risks and Challenges
The cost side of the business represents a key risk and challenge. Century Communities noted elongated cycle times as well as increased materials and labor costs. The company is experiencing production challenges “like all the other home builders do.” So far, CCS is managing to offset these pressures with price appreciation and operational efficiencies.
Because the stock market in general is well-extended to the upside, entry points in CCS must be managed carefully. The stock is also well-extended to the upside thanks to market excitement over the earnings report. Per the strategy from the seasonal trade on home builders, buying the dips for the next month or two should be well-supported by the positive momentum associated with anticipation for the Spring selling season. Yet, CCS is not likely to dip much without a stock market correction or pullback. A covered call position is one way to achieve a lower cost entry albeit with a tight cap on short-term gains.
At the time of writing, the March $65 call is selling for about $3.15. So with the stock trading at $62.50, the position offers protection back to the high point of the first post-earnings trading day. Gains are capped at $68.15 or 9.0%, a respectable gain over 5 weeks. The ideal scenario consists of the stock drifting close to but not above $65 by expiration day at which point a fresh decision can be made on selling another covered call or ending the trade altogether.
Be careful out there!
Full disclosure: no positions