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MDC or TPH: Which Homebuilding Stock is a More Profitable Pick?

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The U.S. housing industry has been rallying on solid home buying activity despite supply-side bottlenecks as well as the risk of future interest rate hikes. Also, continued labor and material woes are not enough to limit homebuilders, thanks to solid demand and limited homes in inventory.

Per the Commerce Department’s latest data released on Apr 1, spending on construction activity inched up 0.5% to $1,704.4 billion in February 2022 from January’s revised reading of $1,695.5 billion. The metric increased 11.2% on a year-over-year basis.

Residential construction spending inched up 1.1% from a month ago and rose 16.5% from the prior year’s levels. Non-residential also increased 6.2% year over year but slipped 0.1% from the prior month’s levels. The upside was mainly attributable to increased spending on private projects like new single-family homes (up 2.5% from the previous month and 20% over a year).

Non-residential construction was strong in lodging, public safety, power, sewage and waste disposal, water supply as well as manufacturing sectors.

The latest construction spending data encourages the Zacks Building Products - Home Builders industry bellwethers like M.D.C. Holdings, Inc. (MDC - Free Report) , Tri Pointe Homes, Inc. (TPH - Free Report) , D.R. Horton, Inc. (DHI - Free Report) and Lennar Corporation (LEN - Free Report) , each carrying a Zacks Rank #2 (Buy). This winning streak will likely continue in 2022, given impressive unemployment data (which improved 0.2 percentage points to 3.6% in March from the previous month), low mortgage rates and increasing buyer traffic.

Based on various parameters, let’s check whether MDC or Tri Pointe is a more profitable stock. It is to be noted that both companies are almost neck to neck in terms of market cap. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Determinants of the Stocks

MDC — with a market cap of more than $2.76 billion — engages in building and selling single-family detached homes for first-time and move-up buyers under the name “Richmond American Homes.”

The company’s Build-to-Order process, also known as “dirt sales”, provides buyers with a wide range of choices in major aspects of their future home and personalized customer experience through in-house community teams. MDC’s Financial Services operations offer mortgage loans, insurance coverage and title agency services to its subsidiaries and customers in the United States.

Tri Pointe — with a market cap of almost $2.22 billion — designs, constructs and sells innovative single-family detached and attached homes designed primarily for entry-level, move-up, luxury and active adult homebuyers. The company builds premium homes and communities in 10 states.

The company has been benefiting from solid homebuilding industry fundamentals, land acquisition strategy and cost control measures. Also, strong demographics and limited availability of homes are likely to aid the company in the future. The company anticipates that potential homeowners will continue to seek homeownership despite rising home prices and increasing rental costs.

Strong Brand Presence & Customer Spectrum

Although MDC is a slightly bigger company in terms of market cap, Tri Pointe has a broad spectrum of customers as it serves luxury and active adults and entry-level and move-up buyers. Also, Tri Pointe’s homebuilding segments build attached and detached single-family homes, town homes as well as condominiums.

Bboth companies’ investments in land acquisition and development are encouraging.

Outlook

For the first quarter of 2022, MDC projects home deliveries to be 2,000-2,300 units and an average selling price within $550,000-$560,000. The home deliveries projection reflects 1.3% fall from a year ago figure of 2,178 units, considering the mid-point of the guidance. Home sales gross margin for the quarter is expected of approximately 25% (assuming no impairments or warranty adjustments), up from 21.9% reported a year ago.

MDC anticipates 2022 home deliveries between 10,500 and 11,000 homes, reflecting 7.7% year-over-year growth (considering the mid-point of the guidance).

For the first quarter, Tri Pointe projects home deliveries of 900-1,100 homes and average sales price in $650,000-$660,000 range. The home deliveries projection reflects 11.2% fall from a year ago figure of 1,126 units, considering the mid-point of the guidance. Homebuilding gross margins are expected to be in the range of 25-26%, up from 23.9% reported a year ago.

TPH anticipates 2022 home deliveries between 6,500 and 6,800 homes, reflecting 7.5% year-over-year growth (considering the mid-point of the guidance).

Zacks Estimates & Stock Performance

Despite intense inflationary pressure and persistent supply issues, the housing industry has been rallying on robust demand. Depending on the ability to yield higher profits amid headwinds, both companies are expected to generate higher earnings.

For MDC, the Zacks Consensus Estimate for 2022 earnings indicates 35.5% year-over-year growth. Tri Pointe’s bottom line for 2022 is likely to improve 21.1%. Although Tri Pointe’s earnings expectation reflects comparatively less year-over-year growth than MDC, it has a VGM Score of B, better than MDC score of C.

Zacks Investment Research
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Shares of MDC and Tri Pointe have declined 39.5% and 8.5%, respectively, in the past year compared with the industry’s 22.54% fall. Although both the stocks have performed unimpressively, TPH have fared better than MDC and industry as a whole.

A Look at Stocks’ Profitability & Valuation

Return on Equity in the trailing 12 months for MDC is 23.9% compared with Tri Pointe and the industry’s 20.1% and 22.8%, respectively. Markedly, MDC provides more impressive returns to investors than Tri Pointe and the industry.

The trailing 12-month price-to-earnings multiple for MDC and Tri Pointe is 4.74 and 4.83, respectively, compared with 6.04 for the industry. Both MDC and Tri Pointe’s shares are cheaper than the industry.

Our Take

Tri Pointe certainly has the edge over MDC in terms of customer spectrum, VGM score and price performance. Nonetheless, MDC has solid prospects, provides better returns to investors and is quite cheaper than both Tri Pointe and the industry as a whole. Both the companies remain optimistic about overall homebuilding growth trends, given promising fundamentals and prospects.

A Brief Overview of the Other Two Stocks

D.R. Horton: This Texas-based prime homebuilder continues to gain from industry-leading market share, solid acquisition strategy, a well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.

D.R. Horton’s earnings are expected to rise 39.2% year over year in fiscal 2022.

Lennar: This well-known homebuilder is benefiting from effective cost control and focus on making its homebuilding platform more efficient, leading to higher operating leverage.

Lennar’s earnings for fiscal 2022 are expected to rise 15.1% year over year.