Investors interested in stocks from the Building Products - Home Builders sector have probably already heard of Taylor Morrison Home (TMHC - Free Report) and KB Home (KBH - Free Report) . But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
There are plenty of strategies for discovering value stocks, but we have found that pairing a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system produces the best returns. The proven Zacks Rank emphasizes companies with positive estimate revision trends, and our Style Scores highlight stocks with specific traits.
Taylor Morrison Home and KB Home are sporting Zacks Ranks of #1 (Strong Buy) and #3 (Hold), respectively, right now. This system places an emphasis on companies that have seen positive earnings estimate revisions, so investors should feel comfortable knowing that TMHC is likely seeing its earnings outlook improve to a greater extent. But this is just one piece of the puzzle for value investors.
Value investors analyze a variety of traditional, tried-and-true metrics to help find companies that they believe are undervalued at their current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
TMHC currently has a forward P/E ratio of 8, while KBH has a forward P/E of 10.25. We also note that TMHC has a PEG ratio of 1.03. This popular figure is similar to the widely-used P/E ratio, but the PEG ratio also considers a company's expected EPS growth rate. KBH currently has a PEG ratio of 1.24.
Another notable valuation metric for TMHC is its P/B ratio of 0.94. The P/B ratio pits a stock's market value against its book value, which is defined as total assets minus total liabilities. For comparison, KBH has a P/B of 1.10.
These metrics, and several others, help TMHC earn a Value grade of B, while KBH has been given a Value grade of C.
TMHC has seen stronger estimate revision activity and sports more attractive valuation metrics than KBH, so it seems like value investors will conclude that TMHC is the superior option right now.