Lennar Corporation (NYSE:LEN) shares are up more than 27.23% this year and recently decreased -0.87% or -$0.48 to settle at $54.62. D.R. Horton, Inc. (NYSE:DHI), on the other hand, is up 62.17% year to date as of 11/03/2017. It currently trades at $44.32 and has returned 0.05% during the past week.
Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI) are the two most active stocks in the Residential Construction industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect LEN to grow earnings at a 9.71% annual rate over the next 5 years. Comparatively, DHI is expected to grow at a 13.76% annual rate. All else equal, DHI’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 12.12% for D.R. Horton, Inc. (DHI). LEN’s ROI is 6.90% while DHI has a ROI of 8.80%. The interpretation is that DHI’s business generates a higher return on investment than LEN’s.
The value of a stock is simply the present value of its future free cash flows. LEN’s free cash flow (“FCF”) per share for the trailing twelve months was +2.10. Comparatively, DHI’s free cash flow per share was -0.35. On a percent-of-sales basis, LEN’s free cash flow was 4.51% while DHI converted -1.08% of its revenues into cash flow. This means that, for a given level of sales, LEN is able to generate more free cash flow for investors.
LEN’s debt-to-equity ratio is 0.91 versus a D/E of 0.39 for DHI. LEN is therefore the more solvent of the two companies, and has lower financial risk.
LEN trades at a forward P/E of 11.28, a P/B of 1.68, and a P/S of 1.04, compared to a forward P/E of 14.02, a P/B of 2.23, and a P/S of 1.22 for DHI. LEN is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. LEN has a beta of 1.30 and DHI’s beta is 1.27. DHI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. LEN has a short ratio of 2.72 compared to a short interest of 2.50 for DHI. This implies that the market is currently less bearish on the outlook for DHI.
Lennar Corporation (NYSE:LEN) beats D.R. Horton, Inc. (NYSE:DHI) on a total of 7 of the 13 factors compared between the two stocks. LEN has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, LEN is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, PHM has better sentiment signals based on short interest.