Earnings

Choosing Between TRI Pointe Group, Inc. (TPH) and KB Home (KBH)

TRI Pointe Group, Inc. (NYSE:TPH) shares are up more than 52.96% this year and recently increased 1.56% or $0.27 to settle at $17.56. KB Home (NYSE:KBH), on the other hand, is up 97.09% year to date as of 12/08/2017. It currently trades at $31.16 and has returned 1.23% during the past week.

TRI Pointe Group, Inc. (NYSE:TPH) and KB Home (NYSE:KBH) are the two most active stocks in the Residential Construction industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect TPH to grow earnings at a 8.25% annual rate over the next 5 years. Comparatively, KBH is expected to grow at a 24.86% annual rate. All else equal, KBH’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 5.39% for KB Home (KBH). TPH’s ROI is 5.90% while KBH has a ROI of 2.70%. The interpretation is that TPH’s business generates a higher return on investment than KBH’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. TPH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, KBH’s free cash flow per share was +1.66. On a percent-of-sales basis, TPH’s free cash flow was 0.38% while KBH converted 3.99% of its revenues into cash flow. This means that, for a given level of sales, KBH is able to generate more free cash flow for investors.

Financial Risk

TPH’s debt-to-equity ratio is 0.91 versus a D/E of 1.36 for KBH. KBH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TPH trades at a forward P/E of 11.37, a P/B of 1.44, and a P/S of 1.08, compared to a forward P/E of 14.61, a P/B of 1.46, and a P/S of 0.64 for KBH. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. TPH is currently priced at a -0.68% to its one-year price target of 17.68. Comparatively, KBH is 20.54% relative to its price target of 25.85. This suggests that TPH is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for TPH and 3.20 for KBH, which implies that analysts are more bullish on the outlook for KBH.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. TPH has a beta of 1.76 and KBH’s beta is 1.70. KBH’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. TPH has a short ratio of 8.05 compared to a short interest of 4.41 for KBH. This implies that the market is currently less bearish on the outlook for KBH.

Summary

TRI Pointe Group, Inc. (NYSE:TPH) beats KB Home (NYSE:KBH) on a total of 8 of the 14 factors compared between the two stocks. TPH is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, TPH is the cheaper of the two stocks on an earnings and book value, TPH is more undervalued relative to its price target. Finally, DHI has better sentiment signals based on short interest.

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