D.R. Horton, Inc. (DHI) and PulteGroup, Inc. (PHM) are two prominent homebuilders in the United States. DHI is a homebuilding company that acquires and develops land and constructs and sells homes. It also provides mortgage financing services, title insurance policies, examination, and closing services, engages in the residential lot development business, and owns and operates oil and gas-related assets. PHM acquires and develops land primarily for residential purposes, constructs housing, and offers various home designs, including single-family detached, townhomes, condominiums, and duplexes. It arranges financing through the origination of mortgage loans primarily for homebuyers, sells the servicing rights for the originated loans, and provides title insurance policies and examination and closing services to homebuyers.

The pandemic-induced remote working lifestyle, low mortgage rates, and an improving job market led to surging demand for housing. This, coupled with declining inventory, caused home prices to increase by 18.8% in 2021. However, despite rising mortgage rates and escalating supply chain disruptions, lack of inventory and surging demand should keep the housing market red-hot this year as well.

Investors’ interest in this space is evident from the Invesco Dynamic Building & Construction ETF’s (PKB) marginal returns over the past week. The global residential building construction market is expected to grow at a 10.3% CAGR to reach $8.06 trillion by 2025. So, both DHI and PHM should benefit.

DHI is a winner with 1.4% gains over the past week versus PHM’s 0.2% loss. But which of these stocks is a better pick now? Let’s find out.

Recent Financial Results

DHI’s revenues for its fiscal 2021 fourth quarter ended December 31, 2021, increased 18.9% year-over-year to $7.05 billion. The company’s income before income taxes came in at $1.50 billion for the quarter, up 44.8% from the prior-year period. While its net income increased 44.2% year-over-year to $1.14 billion, its EPS grew 48.1% to $3.17. As of December 31, 2021, the company had $2.44 billion in cash and cash equivalents.

For its fiscal 2021 fourth quarter ended December 31, 2021, PHM’s total revenues increased 36.5% year-over-year to $4.36 billion. The company’s pre-tax income came in at $855.92 million, representing a 63.4% rise from the prior-year period. Its adjusted net income came in at $637.31 million, indicating a 53.7% year-over-year improvement. PHM’s adjusted EPS increased 64.1% year-over-year to $2.51. The company had $1.78 billion in cash and cash equivalents as of December 31, 2021.

Past and Expected Financial Performance

DHI’s net income, tangible book value, and total assets have increased at CAGRs of 42.7%, 20%, and 19.8%, respectively, over the past three years.

DHI’s EPS is expected to grow 37.9% year-over-year in fiscal 2022, ending December 31, 2022, and 6% in fiscal 2023. Its revenue is expected to grow 26.8% year-over-year in fiscal 2022 and 8.5% in fiscal 2023. Analysts expect the company’s EPS to grow at an 11% rate per annum over the next five years.

PHM’s net income, tangible book value, and total assets have increased at CAGRs of 24%, 16.1%, and 9.5%, respectively, over the past three years.

Analysts expect PHM’s EPS to improve 39.8% year-over-year in fiscal 2022, ending December 31, 2022, and 11.2% in fiscal 2023. Its revenue is expected to grow 19% year-over-year in fiscal 2022 and 10.9% in fiscal 2023. Analysts expect the company’s EPS to grow at a 9.2% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, DHI is currently trading at 0.96x, 17.1% higher than PHM’s 0.82x. In terms of forward EV/EBITDA, PHM’s 3.63x compares with DHI’s 4.4x.

Profitability

DHI’s trailing-12-month revenue is almost 2.1 times PHM’s. DHI is also more profitable, with a 20.5% EBITDA margin versus PHM’s 18.9%.

Furthermore, DHI’s ROE, ROA, and ROTC of 31.6%, 16.3%, and 19% compare with PHM’s 27.7%, 12.5%, and 15.8%, respectively.

POWR Ratings

While PHM has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, DHI has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both PHM and DHI have a B grade for Sentiment, consistent with analysts’ expectations of a solid increase in earnings. PHM’s EPS is expected to grow 39.8% year-over-year to $10.25 for fiscal 2022, ending December 31, 2022. The consensus EPS estimate of $15.74 for DHI’s fiscal 2022, ending December 31, 2022, represents a 37.9% rise from the prior-year period.

In terms of Value, both PHM and DHI have a C grade for Value, consistent with their slightly higher-than-industry valuation ratios. PHM’s 11.52x forward Price/Cash Flow is 4.9% higher than the 10.99x industry average. DHI has a 1.03x forward Price/Sales, 0.3% higher than the industry average of 1.03x.

Of the 24 stocks in the B-rated Homebuilders industry, PHM is ranked #1, while DHI is ranked #10.

Beyond what we have stated above, our POWR Ratings system has also rated DHI and PHM for Stability, Quality, Growth, and Momentum. Get all PHM ratings here. Also, click here to see the additional POWR Ratings for DHI.

The Winner

Despite rising mortgage rates, strong demand and lack of inventory should benefit both PHM and DHI. However, a lower valuation makes PHM a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Homebuilders industry.

DHI shares were unchanged in after-hours trading Tuesday. Year-to-date, DHI has declined -23.46%, versus a -5.34% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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