KB Home (NYSE:KBH) and TRI Pointe Group, Inc. (NYSE:TPH) are the two most active stocks in the Residential Construction industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect KBH to grow earnings at a 24.67% annual rate over the next 5 years. Comparatively, TPH is expected to grow at a 8.25% annual rate. All else equal, KBH’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. KB Home (KBH) has an EBITDA margin of 5.07%, compared to an EBITDA margin of 9.49% for TRI Pointe Group, Inc. (TPH). This suggests that TPH underlying business is more profitable. KBH’s ROI is 2.70% while TPH has a ROI of 5.90%. The interpretation is that TPH’s business generates a higher return on investment than KBH’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, KBH’s free cash flow was 0% while TPH converted -4.34% of its revenues into cash flow. This means that, for a given level of sales, KBH is able to generate more free cash flow for investors.
KBH trades at a forward P/E of 12.22, a P/B of 1.24, and a P/S of 0.51, compared to a forward P/E of 9.68, a P/B of 1.25, and a P/S of 0.96 for TPH. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. KBH is currently priced at a 14.77% to its one-year price target of $22.34. Comparatively, TPH is -7.01% relative to its price target of $15.41. This suggests that TPH 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 3.10 for KBH and 2.30 for TPH, which implies that analysts are more bullish on the outlook for KBH.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. KBH has a beta of 1.51 and TPH’s beta is 1.66. KBH’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. KBH has a short ratio of 3.87 compared to a short interest of 14.58 for TPH. This implies that the market is currently less bearish on the outlook for KBH.
KB Home (NYSE:KBH) beats TRI Pointe Group, Inc. (NYSE:TPH) on a total of 7 of the 12 factors compared between the two stocks. KBH is growing fastly, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, KBH is the cheaper of the two stocks on book value and sales basis, Finally, KBH has better sentiment signals based on short interest.