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LEN or DHI: Which Housing Bigwig Has More Potential in 2021?

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Despite the fact that 2020 has been a year of unprecedented events, the U.S. housing market remains one of the few blooming sectors that has been contributing to economic recovery of the country. Declining mortgage rates and the desire for more space and amenities to accommodate work from home as well as at-home learning should continue to boost the U.S. housing market in the near term as well.

Notable homebuilders like D.R. Horton, Inc. (DHI - Free Report) , Lennar Corporation (LEN - Free Report) , PulteGroup, Inc. (PHM - Free Report) and Toll Brothers, Inc. (TOL - Free Report) have been experiencing strong demand amid the pandemic and expect this trend to continue in 2021 as well. As released by the National Association of Home Builders/Wells Fargo Housing Market Index, builders’ confidence in December marks the second-highest reading in the history of the series.

Given the current scenario, quality homebuilding stocks could offer a safe haven because of their stability and the fact that these are fundamentally strong enough to withstand the industry woes.

Among the industry bellwethers, Lennar and D.R. Horton are the most prominent ones.

Before drawing a head-to-head comparison between Zacks Ranked #1 (Strong Buy) stocks Lennar and D.R. Horton, let’s check out a few key statistics of the companies. You can see the complete list of today’s Zacks #1 Rank stocks here.

What Defines the Housing Giants?

In terms of market capitalization, the two companies are almost neck to neck. With a market cap of $26.4 billion, D.R. Horton offers a diverse line of homes across various price points through a multi-brand platform like D.R. Horton, Emerald Homes, Express Homes and Freedom Homes. Moreover, the company enjoys one of the broadest geographic diversities in the industry and is not dependent on any particular market. It has a strong presence in 88 markets across 29 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States.

D.R. Horton is also fast acquiring homebuilding companies in desirable markets to expand reach. Its recent acquisition was that of homebuilding operations of Braselton Homes, the largest homebuilder in Corpus Christi, TX.

D.R. Horton ended fiscal 2020 on a strong note, highlighted by an 81% year-over-year increase in net sales orders for the fiscal fourth quarter, a 60% increase in consolidated pre-tax income to $1.1 billion and a 27% increase in revenues to $6.4 billion. With 65,388 homes closed in fiscal 2020, the company completed its 19th consecutive year as the largest homebuilder in the United States. Order backlog of homes at fiscal fourth quarter-end was 26,683 homes, up 96% year over year. The value of backlog was also up 98% from the prior year to $8.2 billion.

Conversely, Miami-based Lennar — with a market cap of $24.9 billion — operates as a homebuilder, primarily under the Lennar brand in the United States, targeting first-time, move-up, and active adult homebuyers. The company provides mortgage financing and related services to customers through the financial services segment.

Lennar’s core homebuilding results remained resilient in fiscal 2020, given strong housing demand in the final quarter of fiscal 2020 as lower rates, work-from-home trends and low supply of home inventory boosted home sales. The results also benefited from effective cost control and focus on making its homebuilding platform more efficient, which in turn resulted in higher operating leverage. Full-year 2020 earnings came in at $7.85 per share, up 36.8% from the fiscal 2019 level. Revenues were $22.5 billion, up from $22.3 billion a year ago. Deliveries grew to 52,813 homes from 51,412 homes in fiscal 2019.

The company was successful in meeting the target of achieving lower SG&A percentage in fiscal 2016, 2017, 2018, 2019 and 2020. During fiscal 2020, SG&A expenses — as a percentage of revenues from home sales — improved 20 basis points or bps, courtesy of improved operating leverage as a result of an increase in home deliveries and continued benefits from technology initiatives. The company is focused on reducing operating costs in order to drive the bottom line and cash flow.

New orders during the fiscal fourth quarter grew 16% from the year-ago period to 15,214 homes. Potential value of net orders also increased 22% year over year to $6.3 billion. Backlog at fiscal fourth quarter-end inched up 21% from a year ago to 18,821. Potential housing revenues from backlog also advanced 24% year over year to $7.8 billion.

YTD Stock Performance



D.R. Horton and Lennar have gained 37.1% and 44%, respectively, so far this year. The Homebuilding industry has collectively gained 29% during the period. Hence, Lennar fared much better than D.R. Horton in this parameter.

Earnings Growth Rate & Surprises

The ability to consistently boost profit levels defying industry woes is a defining characteristic of the best companies. Analysts expect D.R. Horton’s earnings to grow at a 12.4% rate over the next three to five years. Comparatively, Lennar’s earnings are expected to grow 10.7% over the same time frame. Hence, D.R. Horton’s higher growth rate implies greater potential for capital appreciation.

D.R. Horton is expected to witness 23.6% year-over-year earnings growth for fiscal 2021 whereas Lennar’s earnings are expected to grow 8.3% in fiscal 2021.

Hence, D.R. Horton is a clear winner in terms of earnings growth expectation.

Meanwhile, considering a more comprehensive earnings history, both Lennar and D. R. Horton beat earnings estimates in all the last four quarters. Lennar has a superior average earnings surprise of 32.1% than D.R. Horton’s 21.6%.

Profitability and Returns

Profitability and returns are a measure of the quality of a company’s business and growth opportunities. Return on Capital of Lennar is 8.2%, while that of D.R. Horton and the homebuilding industry is 13.1% and 8.8%, respectively. This signifies that D.R. Horton’s business generates a higher return on investment than Lennar’s.

Return on Equity (ROE) is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE in the trailing 12 months for D.R. Horton and Lennar is 20.7% and 14.2%, respectively. While Lennar’s is in line with the industry level of 14.2%, D.R. Horton has an edge here.

Valuation

Let’s have a look at the stocks’ P/E and P/B ratios compared with the homebuilding industry.

The current forward 12-month price-to-earnings (P/E) multiple for Lennar and D.R. Horton is 9.62 and 8.86, respectively, while that of the industry is 9.02. D.R. Horton’s shares are cheaper than Lennar.

Again, the current trailing 12-month price-to-book (P/B) multiple for Lennar is 1.39 compared with 2.17 for D.R. Horton. The industry’s P/B is 1.54x.

Lennar is the cheaper of the two stocks on a P/E and P/B basis.

Bottom Line

Homebuilders are expected to gain from continued strong demand in the housing market backed by Fed’s dovish stance, low borrowing costs, suburban shift of the population, cost-control efforts and focus on entry-level buyers. Additionally, the need to rebuild inventories is expected to drive the U.S. housing.

Currently, D.R. Horton’s industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots and homes, along with affordable product offerings across multiple brands and strong operational performance make it a better housing pick than Lennar. Specially, in terms of earnings growth expectation and returns, D.R. Horton has more upside potential than Lennar in 2021.

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PulteGroup, Inc. (PHM) - free report >>

Toll Brothers Inc. (TOL) - free report >>

Lennar Corporation (LEN) - free report >>

D.R. Horton, Inc. (DHI) - free report >>