Earnings

Comparing D.R. Horton, Inc. (DHI) and KB Home (KBH)

D.R. Horton, Inc. (NYSE:DHI) shares are up more than 85.07% this year and recently increased 0.48% or $0.24 to settle at $50.58. KB Home (NYSE:KBH), on the other hand, is up 96.58% year to date as of 12/15/2017. It currently trades at $31.08 and has returned -0.26% during the past week.

D.R. Horton, Inc. (NYSE:DHI) and KB Home (NYSE:KBH) are the two most active stocks in the Residential Construction industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect DHI to grow earnings at a 15.30% 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

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 5.39% for KB Home (KBH). DHI’s ROI is 9.80% while KBH has a ROI of 2.70%. The interpretation is that DHI’s business generates a higher return on investment than KBH’s.

Cash Flow 




Cash is king when it comes to investing. DHI’s free cash flow (“FCF”) per share for the trailing twelve months was +1.41. Comparatively, KBH’s free cash flow per share was +1.66. On a percent-of-sales basis, DHI’s free cash flow was 3.75% 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

DHI’s debt-to-equity ratio is 0.37 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

DHI trades at a forward P/E of 13.81, a P/B of 2.45, and a P/S of 1.34, compared to a forward P/E of 14.57, a P/B of 1.45, and a P/S of 0.64 for KBH. DHI is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. DHI is currently priced at a 1.16% to its one-year price target of 50.00. Comparatively, KBH is 20.23% relative to its price target of 25.85. This suggests that DHI 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 2.30 for DHI and 3.20 for KBH, which implies that analysts are more bullish on the outlook for KBH.

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. DHI has a beta of 1.32 and KBH’s beta is 1.69. DHI’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. DHI has a short ratio of 3.20 compared to a short interest of 4.60 for KBH. This implies that the market is currently less bearish on the outlook for DHI.

Summary

D.R. Horton, Inc. (NYSE:DHI) beats KB Home (NYSE:KBH) on a total of 9 of the 14 factors compared between the two stocks. DHI is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. DHI is more undervalued relative to its price target. Finally, DHI has better sentiment signals based on short interest.

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