United Homes Group: Margins Rise as Orders Fall—Is This a Hidden Growth Gem?

The housing market's ongoing volatility has taken a toll on United Homes Group (NASDAQ: UHG), with net new orders and home closings declining sharply in Q2 2025. Yet beneath the surface, the company is executing a bold strategy to reposition itself: a product refresh initiative that has boosted gross margins by 300 basis points compared to legacy products. For investors, the question is whether this margin-driven turnaround can offset current headwinds and unlock undervalued growth potential.

The Numbers: A Story of Trade-Offs

United Homes' Q2 results were mixed but revealing. Net new orders fell 5.9% YoY to 304 units, while home closings dropped 10.1% to 303 units. The decline stems partly from a 10% reduction in active communities—a deliberate strategy to streamline operations while preparing for a second-half expansion. However, this contraction has left inventory dynamics uneven: backlog rose 33% to 202 units (delayed closings), while speculative homes increased 10% to 418 units.

The silver lining? Margins. The product refresh initiative, which introduced modernized designs and cost-efficient construction methods, has already shown impact. In Q2, homes closed with refreshed plans averaged 24% gross margins, far outpacing legacy products. By April 2025, 91 homes in backlog and roughly 200 under construction were part of this pipeline. Management forecasts that the refreshed mix and new community openings will drive year-over-year gross margin improvements in 2025, a critical shift in profitability.

The Turnaround Play: Betting on H2

The company's optimism hinges on two pillars: new community launches and margin expansion. By late 2025, management expects active communities to rise by double digits, reversing the YoY decline. This expansion should reignite net new orders and closings, particularly in regions where demand for affordable, high-margin homes is strongest.

Financially, UHG remains resilient. A current ratio of 4.44 signals robust short-term liquidity, and the $86.9M in available capital as of March 2025 provides a cushion for strategic moves. While Q1 adjusted EBITDA dipped to $2.9M (vs. $7.3M in 2024), the sequential improvement in April—driven by higher-margin closings—hints at stabilization.

Risks and Realities

The strategy isn't without pitfalls. First, execution is key: delays in new community openings or weaker-than-expected demand for refreshed products could prolong the revenue slump. Second, the broader housing market remains fragile, with rising interest rates and affordability constraints压制ing buyer confidence. Finally, the company's exploration of strategic alternatives—including a potential sale—adds uncertainty.

Investment Thesis: A High-Reward Opportunity?

At current valuations, UHG trades at roughly 6x forward EBITDA (assuming 2025 margin improvements materialize), a discount to peers like KB Home (KBH) and Toll Brothers (TOL). If the product refresh and community expansion plans succeed, the stock could re-rate significantly. However, investors must weigh near-term risks against long-term upside:

• Bull Case: New communities drive a 20% rebound in net new orders by 2026, and refreshed products lift gross margins to 20%+, boosting EBITDA to $40M+.
• Bear Case: Demand remains weak, margin gains stall, and liquidity strains force strategic concessions (e.g., asset sales at depressed prices).

Final Take

United Homes Group is a classic “turnaround” play: its stock price reflects current struggles but not the potential of its margin-enhancing strategy. For aggressive investors with a 12–18 month horizon, UHG could offer asymmetric returns if the H2 initiatives gain traction. However, the path to success is narrow—execution must be flawless.

Recommendation: Consider a small position in UHG, using dips below $15/share as entry points. Monitor Q3 updates on community openings and margin progress closely—these will be key catalysts. For the risk-averse, wait for clearer evidence of demand recovery before committing.