Better Buy for 2022: Lennar vs. D.R. Horton

Lennar Corporation (LEN) in Miami, Fla., operates as a homebuilder primarily under the Lennar brand in the United States. It operates through Homebuilding East, Homebuilding Central, Homebuilding Texas, Homebuilding West, Financial Services, Multifamily, and Lennar Other segments. In comparison, D.R. Horton, Inc. (DHI) in Fort Worth, Tex., operates as a homebuilding company in the East, North, Southeast, South Central, Southwest, and Northwest regions in the United States. It acquires and develops land and constructs and sells residential homes.

Multi-decade high inflation and supply chain constraints could mar the near-term growth of the home builders’ industry. However, the desire to remodel living spaces for comfortable living and remote working should buoy the demand for home building products and services. In addition, relatively low housing inventory is expected to boost new housing construction, benefiting the industry. According to the U.S. Census Bureau, construction spending increased 9% year-over-year to $1.6 billion in December 2021. Moreover, the home builders’ industry is expected to benefit from improving macroeconomic conditions because consumer spending and per capita disposable income are increasing. Therefore, both LEN and DHI should benefit.

DHI’s shares have  gained 9% in price over the past month, while LEN has returned 4%.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Jan. 12, 2022, LEN announced that its Board of Directors increased its annual dividend to $1.50 per share, up 50% year-over-year. Stuart Miller, Executive Chairman of LEN, said, "Once again, we are increasing our dividend as part of our overall strategy of focusing on total shareholder returns. Given our confidence in our operating platform and resulting cash flow generation, we continue to believe a balanced program of debt reduction, stock repurchase, and an increased dividend is appropriate."

On Feb. 2, 2022, Donald R. Horton, DHI’s Chairman of the Board, said, "Our strong balance sheet, liquidity, and low leverage provide us with significant financial flexibility. We plan to maintain our disciplined approach to investing capital in enhancing the long-term value of our company, including returning capital to our shareholders through both dividends and share repurchases consistently."

Recent Financial Results

LEN’s revenue increased 24% year-over-year to $8.43 billion for its fiscal fourth quarter, ended Nov. 30, 2021. The company’s deliveries grew 11% year-over-year to 17,819 homes, while its net earnings came in at $1.19 billion, representing a 35% year-over-year increase. Also, its EPS was  $3.91, up 39% year-over-year.

DHI’s revenues increased 19% year-over-year to $7.05 billion for its fiscal first quarter, ended Dec. 31, 2021. The company’s pre-tax income grew 45% year-over-year to $1.50 billion, while its net income came in at $1.15 billion representing a 44% year-over-year increase. Also, its EPS was  $3.17, up 48% year-over-year.

Past and Expected Financial Performance

LEN’s revenue and EPS have grown at CAGRs of 9.7% and 37.9%, respectively, over the past three years. Analysts expect LEN’s revenue to increase 20.1% in the current year and 7.3% next year. The company’s EPS is expected to grow 11.6% in the current year and 7.2% next year. Furthermore, its EPS is expected to grow at 23.7% per annum over the next five years.

In comparison, DHI’s revenue and EPS have grown at CAGRs of 21.1% and 45%, respectively, over the past three years. The company’s revenue is expected to increase 25.6% in the current year and 8.2% next year. Its EPS is expected to grow 35.6% in the current year and 6.4% next year. Also, DHI’s EPS is expected to grow at 11% per annum over the next five years.

Profitability

DHI’s trailing-12-month revenue is 1.06 times what LEN generates. However, LEN is more profitable with an EBITDA margin and net income margin of 21.27% and 16.33%, respectively, compared to DHI’s 20.45% and 15.66%.

However, DHI’s 31.56%, 16.30%, and 19.02% respective ROE, ROA, and ROTC are higher than LEN’s 22.80%, 11.25%, and 13.39%.

Valuation

In terms of forward non-GAAP PEG, DHI is currently trading at 0.18x, which is higher than LEN’s 0.16x. And DHI’s 0.94x forward EV/S ratio is higher than LEN’s 0.93x.

So, LEN is relatively affordable here.

POWR Ratings

LEN has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, DHI has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

LEN has a grade of B for Quality. This is justified given LEN's 11.44% trailing-12-month levered FCF margin, which is 97.9% higher than the 5.78% industry average. In comparison, DHI has a Quality grade of C, which is in sync with its negative trailing-12-month levered FCF margin, compared to the 5.78% industry average.

Of the 24 stocks in the Homebuilders industry, LEN is ranked #7. In comparison, DHI is ranked #14.

Beyond what I have stated above, we have also rated the stocks for Growth, Value, Momentum, Stability, and Sentiment. Click here to view all the LEN ratings. Also, get all the DHI ratings here.

The Winner

The homebuilder sector is witnessing solid growth with the reopening of construction activities. But while both LEN and DHI are expected to gain, we think it is better to bet on LEN now because of its lower valuation.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Homebuilders industry here.

DHI shares were trading at $86.67 per share on Tuesday afternoon, up $1.33 (+1.56%). Year-to-date, DHI has declined -20.08%, versus a -5.11% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

More...