Tri Pointe Homes: Shares Have More Room To Run

seekingalpha06-13

Tri Pointe Homes has shown impressive growth in the homebuilding market, with shares up 84.3% since June 2022.Despite some setbacks in 2023, the company has seen revenue and profitability increase in ...

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The Good BrigadeFor several years now, I have been very interested in the homebuilding market. My fascination in it stems from my formative days as an investor. I originally started doing my own investing after living through the housing collapse that began in 2007. In addition to that nostalgia, I find the dynamics of this market to be interesting. For multiple reasons I won't go into, and that you very likely know already, this country continues to face housing shortages year after year. Because of inflation, demand for housing, and the fact that houses have increased in size for the past few decades, we seem to be almost perpetually in a bull market. Obviously, there are some exceptions to this. As interest rates started to rise, housing data started to come in weak. And even though interest rates remain elevated, the demand for housing caused by the aforementioned issues has resulted in some rather impressive results for the companies in this space. One of the firms in this market that I follow rather closely is Tri Pointe Homes (NYSE:TPH). As of this writing, the company has a market capitalization of $3.54 billion. Back when I originally rated the company a ‘buy’ in June of 2022, I felt that significant upside would eventually be achieved. And that is exactly what we have seen. Since then, shares are up 84.3%. That's over twice the 34.5% increase seen by the S&P 500 over the same window of time. To be clear, the firm has not consistently outperformed the broader market. Since I last reiterated my ‘buy’ rating on the stock in January of this year, shares are up only 7.3% compared to the 9.3% increase seen by the broader market. But I would argue that this underperformance is temporary. In addition to the company seeing some really impressive data points come in, shares look cheap, both on an absolute basis and relative to similar firms. Because of this, and the expectation by management of further growth, I believe that additional upside will eventually occur. Because of this, I've decided to reiterate my ‘buy’ rating on the stock. More good news Author - SEC EDGAR Data When I last wrote about Tri Pointe Homes in January of this year, we only had data covering through the first nine months of 2023. That data now extends through the first quarter of 2024. Before we get to the most recent data available, I think a recap of the 2023 fiscal year is in order. Revenue for that time totaled $3.72 billion. That's actually down 14.6% from a $4.35 billion generated in 2022. This was driven by two primary factors. First, the number of deliveries that the company achieved declined from 6,063 to 5,274. Second, the average price of a home that was delivered fell from $708,000 to $693,000. Obviously, as the market became more competitive, the company had to appeal to customers. And the easiest way to do that is to cut prices. Author - SEC EDGAR Data Net profits for the company also took a hit. We saw net income plunge from $576.1 million to $343.7 million. This is to be expected when both unit count and prices fall. Other profitability metrics suffered as well. Operating cash flow declined from $444.3 million to $195.3 million. If we adjust for changes in working capital, we would get a drop from $659.8 million to $407.1 million. And lastly, EBITDA for the company fell from $807.4 million to $639.7 million. Author - SEC EDGAR Data This is not to say that everything about 2023 was bad. There were some positive developments. For starters, backlog for the company expanded from 1,472 homes to 2,320. Unfortunately, the average price of a home in backlog fell substantially from $791,000 to $695,000. The increase in backlog was made possible by the combination of deliveries falling and a surge in net new orders from 4,377 homes to 6,122. During this time, it's also worth noting that the cancellation rate associated with these homes was cut by nearly half from 19% to 10%. Author - SEC EDGAR Data When it comes to the 2024 fiscal year, we are seeing some even more positive signs. Unlike 2023, revenue is on the climb again. In the first quarter, sales came in at $939.4 million. That's 20.9% above the $777.3 million reported one year earlier. The company benefited from an increase in the number of deliveries from 1,065 to 1,393. Unfortunately, this was offset to some extent by a decline in prices from $722,000 to $659,000. With the increase in revenue also came higher profitability. Net income totaled $99.1 million. That's comfortably above the $74.7 million reported for the first quarter of 2023. Operating cash flow expanded from $135.6 million to $144.7 million, while on an adjusted basis it grew from $87.3 million to $116.8 million. Finally, EBITDA for the business expanded from $134 million to $175.9 million. Author - SEC EDGAR Data There were some other positive developments for the company. Backlog, for instance, is growing. Today, the company has about 2,741 homes in backlog. That's significantly greater than the 2,026 homes that the firm had at the end of the first quarter of last year. Once again, the downside to this is that the average price continues to come in weaker year-over-year, dropping from $742,000 to $712,000. Net new orders, meanwhile, remain strong. In the first quarter of last year, Tri Pointe Homes reported net new orders of 1,619 homes. That number in the first quarter of this year expanded to 1,814 homes. Meanwhile, the cancellation rate continues to fall, dropping from 10% last year to 7% this year. Author - SEC EDGAR Data This data does seem to be at odds with recent housing starts and building permits data. According to the US Census Bureau, for the month of April, which is the most recent month for which we have data, building permits are down about 2% year over year while housing starts are down 0.6%. But with data showing that there is a National Housing shortage of between 4 million and 7 million homes, it's only a matter of time before the combination of strong housing demand and lower prices push sales higher. The catalyst could be interest rate cuts that could still start later this year. And as interest rates fall, the picture for housing should be even more appealing. For this year as a whole, management said that the number of deliveries should come in somewhere between 6,200 and 6,400, though the average price of these will only be between $660,000 and $670,000. Clearly though, that surge in deliveries compared to what was seen last year suggests that management is not worried. Author - SEC EDGAR Data In all honesty, even if things remain unchanged, there could be a nice bit of upside for investors. In the chart above, you can see how shares of the company are priced using historical results for 2023. You can also see forward estimates based on annualizing results experienced in the first quarter of this year. I then, in the table below, compared Tri Pointe Homes to five similar firms. On a price to earnings basis, three of the five companies ended up being cheaper than it. But when it came to the other two valuation metrics, our candidate was the cheapest of the group.   Company Price / Earnings Price / Operating Cash Flow EV / EBITDA   Tri Pointe Homes 10.3 8.7 6.2   LGI Homes (LGIH) 11.6 117.6 15.4   Cavco Industries (CVCO) 18.8 13.2 11.3   Century Communities (CCS) 9.0 74.7 8.8   Beazer Homes USA (BZH) 5.4 25.8 9.9   Dream Finders Homes (DFH) 9.1 16.9 7.4   Click to enlarge Takeaway  In the long run, I think that housing in this country will be very profitable for the companies involved in it. Clearly, Tri Pointe Homes is one of those firms. Recent data provided by management is largely positive, though it would be nice to see average prices rise. Even if that does not come to pass, the stock looks very cheap, both on an absolute basis and relative to similar firms. So even in spite of broader market worries and the price issues associated with backlog and deliveries, I think that a solid ‘buy’ rating is still logical here.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2443518688"}