Toll Brothers, Inc. (NYSE:TOL) shares are down more than -4.12% this year and recently decreased -1.52% or -$0.71 to settle at $46.04. Hovnanian Enterprises, Inc. (NYSE:HOV), on the other hand, is down -40.60% year to date as of 02/06/2018. It currently trades at $1.99 and has returned -1.97% during the past week.
Toll Brothers, Inc. (NYSE:TOL) and Hovnanian Enterprises, Inc. (NYSE:HOV) are the two most active stocks in the Residential Construction industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect TOL to grow earnings at a 12.95% annual rate over the next 5 years.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Toll Brothers, Inc. (TOL) has an EBITDA margin of 14.44%. This suggests that TOL underlying business is more profitable TOL’s ROI is 4.70% while HOV has a ROI of -16.80%. The interpretation is that TOL’s business generates a higher return on investment than HOV’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. TOL’s free cash flow (“FCF”) per share for the trailing twelve months was +3.26. Comparatively, HOV’s free cash flow per share was +0.93. On a percent-of-sales basis, TOL’s free cash flow was 8.62% while HOV converted 5.6% of its revenues into cash flow. This means that, for a given level of sales, TOL is able to generate more free cash flow for investors.
TOL trades at a forward P/E of 10.32, a P/B of 1.62, and a P/S of 1.28, compared to a P/S of 0.13 for HOV. TOL is the expensive 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.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. TOL is currently priced at a -14.44% to its one-year price target of 53.81. Comparatively, HOV is 30.92% relative to its price target of 1.52. This suggests that TOL 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 2.40 for TOL and 4.30 for HOV, which implies that analysts are more bullish on the outlook for HOV.
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. TOL has a beta of 1.36 and HOV’s beta is 1.71. TOL’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. TOL has a short ratio of 3.95 compared to a short interest of 3.53 for HOV. This implies that the market is currently less bearish on the outlook for HOV.
Toll Brothers, Inc. (NYSE:TOL) beats Hovnanian Enterprises, Inc. (NYSE:HOV) on a total of 9 of the 14 factors compared between the two stocks. TOL is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. TOL is more undervalued relative to its price target. Finally, NWHM has better sentiment signals based on short interest.