Tri Pointe Homes Stock: Still Building Value Even After Doubling (NYSE:TPH)

For almost two years now, I’ve been pretty bullish on the housing market in general. One of the companies I’ve been bullish on pretty consistently, even more than the period I was bullish on the real estate market in general was Tri Pointe Homes (NYSE:TPH). In June of this year, I the company reaffirmed as a “buy” candidate. This was based on the impressive growth the business had experienced and the way the shares were priced. Since then, the stock is up 9.6%, while the S&P 500 is up just 0.8%. But my first “purchase” rating on the company came in June 2022. Since then, the stock is up 104.9%. That dwarfs the 37.9% gain seen by the S&P 500 over the same time window.

You would think so such a massive advantage would eventually require a demotion. But in this case, you would be wrong. There are a few indicators about the company that worry me a little. But overall, business is going pretty well. Revenues, profits and cash flows grew significantly year over year. Additionally, the stock is cheap, both on an absolute basis and relative to peers. Add all that up and I think keeping the company a “buy” makes sense at this point.

Still building value

Fundamentally, things are going pretty well for Tri Pointe Homes right now. When we last wrote about the company, we had data covering the first quarter of 2024. But the results now extend to the second quarter of the year. In that quarter, the company’s revenue was $1.15 billion. That’s a 37.9% increase over the $837.3 million the company generated just a year ago. This was despite the average price of a delivered home falling from $698,000 to $666,000. The main driver, then, was an increase in the number of deliveries from 1,173 homes to 1,700 homes.

This increase in the company’s revenue also brought with it higher profitability. Net income nearly doubled from $60.7 million to $118 million. Such a move higher on the bottom line is possible despite home price declines because increased volume has made it possible to spread fixed costs over additional income. For example, general and administrative costs fell from 6.6% of total home construction revenue to 6%. The company also enjoyed a reduction in sales and marketing costs from 5.2% of homebuilding revenue to just 5%. In addition, the cost of home sales fell from 78.8% of homebuilding revenue to just 76.1%. All these small improvements year after year had a big impact on the company’s bottom line.

Other profitability metrics for the business have also improved. For example, EBITDA for the company increased from $129.9 million to $216 million. Some might point out that operating cash flow has worsened quite significantly. It is true. It fell from $62.1 million to $23.2 million. But if we adjust for changes in working capital, we get a sizeable increase from $83.9 million to $128.6 million.

In the chart above, you can see the results for the first half of 2024 compared to the first half of 2023. As was the case in the second quarter, revenue, profit and most cash flow numbers were up year-over-year. The company benefited materially from an increase in deliveries from 2,238 homes to 3,093 homes. Unfortunately, some of this improvement was offset by a drop in the average price for a delivered home from $709,000 to $663,000. Fortunately, that hasn’t stopped the company from making the improvements we’ve already mentioned.

This is not to say that everything about the enterprise was great. There are a few values ​​that were slightly off-putting to me. The first of these is arrears. This represents the total number of homes that have been ordered by customers. In the last quarter, this number reached 2,692 houses. But at the same time last year, it totaled 2,765 homes. It’s also down from the 2,741 homes the company reported for the first quarter of this year. I know the home building data has been depressed due to high interest rates and inflationary pressures. In the short term, this could continue to be a problem. But in the long term, I fully expect growth for the business and the industry as a whole. After all, estimates vary, but there are believed to be between 4 and 7 million fewer homes than this country needs. As long as a wide gap persists, the picture will be positive for homebuilders.

Even though backlog has gone down, we’ve seen cancellation rates come back down to earth compared to where they’ve been in recent years. In 2022, for example, Tri Pointe Homes had a 19% cancellation rate. That was up from the 8% seen in 2021. But by industry standards, even that 19% was pretty low. There have been some home builders with cancellation rates well above these. In the most recent quarter, the cancellation rate was just 9%. This is an increase from the 8% reported a year earlier. But I won’t worry about such a small increase. If we start to see that number climb to something like 12% or more, I will definitely consider that problematic.

The other issue for the company involved net new orders. These are orders for new homes that come in and are not cancelled. In the first quarter of this year, the company enjoyed net new orders totaling 1,814 homes. This is a good improvement over the 1,619 homes reported at the same time last year. But in the last quarter, that reversed. The company reported net new orders of just 1,651 homes. That is, 13.7% below the 1,912 houses ordered in the same period last year. It also means that net new orders for the first half of this year as a whole fell to 3,465 homes, compared to 3,531 homes reported last year. In the most recent earnings conference call, management didn’t provide much detail here. The only thing they said was that towards the last few weeks of the most recent quarter, they started to see improvements as mortgage rates fell below 7%. But we won’t know until the third quarter data shows what it will ultimately look like.

We don’t really know what to expect for the rest of this year. But if we annualize the results seen so far, we would anticipate net profits of $550.7 million, adjusted operating cash flow of $583.5 million and EBITDA of $950 million. Using these estimates, we can see how stock prices are on a forward basis in the chart above. This chart also rates the company using results for 2023. On an absolute basis, I’d say the stock is attractively priced. I’d even say they’re priced a bit attractively if we were to use 2023 numbers. Relative to peers, they’re also attractive. In the table below, we have compared Tri Pointe Homes to five similar companies. On a price-to-earnings basis, only one of the five firms was cheaper than our candidate. But when it came to the other two profitability metrics, our outlook was the cheapest of the bunch.

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Take away

Based on all the data currently available, I have to say I remain a fan of Tri Pointe Homes. The company is doing very well, although investors would be wise to pay attention to backlog and new orders. If we start to see significant additional slack, this could prove slightly problematic. But over the long term, the stock looks attractively priced and the industry should do well. All in all, this makes me feel confident enough to keep the company rated as a “buy” for now.