D.R. Horton vs. Tri Pointe: Which Residential Construction Stock is a Better Buy?

D.R. Horton, Inc. (DHI) is a homebuilding company that acquires and develops land and constructs and sells homes. The Fort Worth, Tex., company also provides mortgage financing services, title insurance policies, and examination and closing services. It engages in the residential lot development business and owns and operates oil and gas-related assets.

Tri Pointe Homes, Inc. (TPH) in Irvine, Calif., designs, constructs and sells single-family residential homes. The company sells its homes through its own sales representatives and independent real estate brokers. It also provides financial services, such as mortgage financing, title and escrow, and property and casualty insurance agency services.

The pandemic-induced home-bound lifestyle over the past year has built up demand for bigger houses in the suburban areas over the past year. This, along with a favorable mortgage rate environment, has fostered soaring demand for housing. The rising costs of raw materials, such as lumber, and low housing inventory, have caused home prices to spike. And because the housing market remains red hot because of the continuing high demand despite gradual inventory improvement, the residential construction industry should witness solid growth.

The global Residential Building Construction Market is expected to grow at a 10.3% CAGR  to reach $8.06 trillion by 2025. So, both DHI and TPH should benefit substantially.

While TPH has gained 3% over the past three months, DHI has retreated marginally. In terms of past nine months’ performance, TPH is a winner with 21.2% gains versus DHI’s 20.3% returns. But, which of these stocks is a better pick now? Let’s find out.

Latest Movements

On April 21, 2021, DHI authorized a new $1 billion stock repurchase program, replacing the company’s previous authorization. With $465.50 million remaining from its prior $1 billion stock repurchase, DHI repurchased 4.5 million shares of common stock for $350.40 million during the  three months ended March 31, 2021. The company plans to repurchase shares incrementally to reduce its outstanding share count each year.

In an announcement dated January 19, 2021, TPH consolidated its six regional homebuilding brands into one unified name—Tri Pointe Homes. The strategic decision to operate as one brand allows it  to organically grow its divisions across the country and look to drive more operational efficiencies at all levels of the organization.

Recent Financial Results

DHI’s revenues for its fiscal second quarter, ended March 31, 2021, increased 43.3% year-over-year to $6.45 billion. The company’s pre-tax income came in at $1.18 billion, up 89.9% from the prior-year period. Its net income has been reported at $929.50 million for the quarter, which represents a 92.6% year-over-year improvement. DHI’s EPS increased 94.6% year-over-year to $2.53. The company had $2.23 billion in total cash, cash equivalents and restricted cash  as of March 31, 2021.

For its fiscal first quarter, ended March 31, 2021, TPH’s total revenues from homebuilding increased 20.7% year-over-year to $718.86 million, and its revenues from  financial services increased 32.1% year-over-year to $2.11 million. The company’s pre-tax income came in at $94.40 million, up 126.4% from the prior-year period. While its net income increased 122.1% year-over-year to $70.80 million, its EPS increased 145.8% year-over-year to $0.59. As of March 31, 2021, the company had $584.67 million in cash and cash equivalents.

Past and Expected Financial Performance

DHI’s revenue and net income have grown  at CAGRs of 17.1% and 40.7%, respectively, over the past three years. The company’s EPS has increased at a 42.2% CAGR  over the past three years.

Analysts expect DHI’s revenue to increase 33% year-over-year in the current quarter (ending June 30, 2021), 8.4% in the current year and 9.5% next year. Its EPS is expected to increase 74.3% year-over-year in the current quarter, 34.9% for the current year, and 18.2% next year.

In comparison, TPH’s revenue and net income grew at CAGRs of 4.1% and 13.1%, respectively, over the past three years. The company’s EPS grew at a 20.5% CAGR  over the past three years.

Analysts expect TPH’s revenue to increase 28.1% in the current quarter (ending June 30, 2021), 45.9% in the current year, and 2.1% next year. Its EPS is expected to increase 59.1% in the current quarter, 20.2% in the current year and 6.2% next year.

Profitability

DHI's trailing-12-month revenue is 7.2 times TPH’s. However, TPH is more profitable, with a 17.4% levered free cash flow margin versus DHI’s 1.9%.

DHI’s 24.7% gross profit margin compares favorably with TPH’s 23.5%.

Valuation

In terms of non-GAAP forward P/E, DHI is currently trading at 8.52x, which is 30.7% higher than TPH, which is currently trading at 6.52x. TPH’s 0.86x forward EV/Sales is significantly lower than DHI’s 1.28x.

Also, in terms of forward EV/EBITDA, DHI’s 6.74x is 34% higher than TPH’s 5.03x.

POWR Ratings

While DHI has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, TPH has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

In terms of Value, TPH has been graded a B grade, which is consistent with its lower-than-industry valuation ratios. TPH’s 0.80x trailing-12-month Price/Sales value is 46.4% lower than the 1.49x industry average. However, DHI’s C grade for Value reflects its higher-than-industry forward Price/Cash Flow (23.15x versus 14.17x).

However, TPH has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. The company’s 17.4% trailing-12-month levered free cash flow margin is 116.1% higher than the 8.1% industry average. In comparison, DHI’s C grade for Quality is in sync with its slightly lower-than-industry-average profit margins. The company’s 1.9% trailing-12-month levered free cash flow margin is 76.5% lower than the 8.1% industry average.

Of 25 stocks in the Homebuilders industry, DHI is ranked #16, while TPH is ranked #4.

Beyond what we’ve stated above, our POWR Ratings system has also rated both DHI and TPH for Growth, Momentum, Stability, and Sentiment. Get all DHI ratings here. Also, click here to see the additional POWR Ratings for TPH.

The Winner

Both DHI and TPH are expected to benefit from the industry tailwinds, but TPH appears to be a better buy here based on its lower valuations and better financials.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Homebuilders industry. 

DHI shares were trading at $90.76 per share on Tuesday afternoon, up $1.18 (+1.32%). Year-to-date, DHI has gained 32.27%, versus a 15.20% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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