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Lennar vs. D.R. Horton: Which Makes a Better Housing Pick?

Zacks

U.S. homebuilding was quite a rage in 2017, giving investors ample scope to rake in handsome gains. The industry is equally attractive this year, courtesy of solid economic growth and job market. Consistent job growth, growing interest from first-time homebuyers as well as high homebuilder confidence are adding to the momentum. Reflecting the positives, total earnings for the construction sector are expected to grow 33.4% in 2018 from the same period last year on 12.6% higher revenues.

Meanwhile, limited land availability, higher material costs and a constrained mortgage environment are keeping homebuilders from responding to rising demand to some extent. Despite these challenges, notable homebuilders like PulteGroup, Inc. PHM, Toll Brothers, Inc. TOL, Lennar Corporation LEN and D.R. Horton, Inc. DHI have been consistently performing well.

Among the industry bellwethers, Lennar and D.R. Horton are the most prominent ones. Despite the companies having strong business lines and solid prospects, Lennar — a Zacks Rank #2 (Buy) stock — appears to be comparatively better as an investment option than the Zacks Rank #3 (Hold) D.R. Horton. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Before drawing a head-to-head comparison between Lennar and D.R. Horton, let’s check out a few key statistics of the companies.

What Defines the Housing Giants?

D.R. Horton, with a market cap of $18.9 billion, offers a diverse line of homes across various price points through a multi-brand platform. Moreover, the company enjoys one of the broadest geographic diversities in the industry and is not dependent on any particular market.

D.R. Horton is fast acquiring homebuilding companies in desirable markets. In October 2017, the company acquired a 75% stake in Forestar Group, a residential and mixed-use real estate development company, for $558 million. The deal will help D.R. Horton expand operations in Texas — an area which has been witnessing positive housing momentum of late. It is also expected to contribute around $1 billion to D.R. Horton’s annual revenues over the next five years.

With a market cap of $14.4 billion, Lennar offers a wide range of homes for first-time, move-up and active adult buyers. While Lennar’s Homebuilding and Financial Services divisions are the primary drivers of near-term revenues and earnings, its ancillary businesses like Rialto, Multi-Family provide diversification as well as complementary long-term growth opportunities.

In February, Lennar acquired CalAtlantic Group Inc. for $9.3 billion (including debt) which will create one of the country’s top three home builders in 24 of the top 30 U.S. markets.

Price Performance

Coming to price performance over the last six months, Lennar has gained 18%, compared with the broader industry’s 13.1%. Meanwhile, D.R. Horton has rallied 20.4% over the period, exceeding both Lennar’s and the broader industry’s performance.



Prospects, Estimates Revisions, Earnings History

The ability to consistently boost profit levels defying industry woes is a defining characteristic of the best companies. Analysts expect D.R. Horton to grow earnings at a 10% rate over the next three to five years. Comparatively, Lennar’s earnings are expected to grow 18.3% over the same time frame. Hence, Lennar’s higher growth rate implies greater potential for capital appreciation.

For the near term, the expected current-year earnings growth rate for D.R. Horton stands at 30.7% compared with 38.9% for Lennar.

Over the past 30 days, Lennar’s earnings estimates for the current year edged up 0.8% to $5.29 per share. Meanwhile, D.R. Horton’s estimates for the current year have increased 0.3% to $3.58.

D.R. Horton’s projected sales growth for the current year is 14.8%, better than Lennar’s average of 12.7%.

Hence, Lennar is a clear winner in terms of earnings growth expectations.

Meanwhile, considering a more comprehensive earnings history, D.R. Horton has delivered positive surprises in all of the trailing four quarters. However, Lennar has surpassed expectations in three of the last four quarters. D.R. Horton has a slightly superior average earnings surprise of 5.8% compared with Lennar’s 4.2%.

Profitability and Returns

Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. Return on Capital (ROC) of Lennar is 6.90%, while D.R. Horton has a ROC of 10.5%. The interpretation is that D.R. Horton’s business generates a higher return on investment than Lennar’s.

Again, Return on Equity (ROE) is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12 months for Lennar and D.R. Horton is 12% and 14.8%, respectively. While both the stocks have scored above the industry level of 11.8%, D.R. Horton has an edge here.

Valuation

Both the stocks are a little overvalued as is evident from their unfavorable P/E, P/B and P/S ratios compared to the homebuilding industry.

The trailing 12-month price-to-earnings (P/E) multiple for Lennar and D.R. Horton are 15.7 and 15.2, respectively, while the industry’s is 14.7. D.R. Horton’s shares look a shade cheaper compared with Lennar.

Again, trailing 12-month price-to-book (P/B) multiple for Lennar is 1.82, compared with 2.09 for D.R. Horton. The industry’s P/B is 1.79.

Trailing 12-month price-to-sales (P/S) multiples for Lennar and D.R. Horton are 1.14 and 1.18, respectively, compared with the industry’s 1.05.

Lennar is cheaper of the two stocks on book value and sales basis.

Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. Lennar has a beta of 1.31 while D.R. Horton’s beta is 1.20. D.R. Horton’s shares are therefore less volatile than that of Lennar.

Bottom Line

Lennar beats D.R. Horton in terms of earnings growth expectation and valuation, while the latter enjoys an advantage in terms of market cap, revenue expectation and returns.

Both the companies remain positive about the overall homebuilding market that will continue to gain on solid demand for homes, favorable job market and strength in economy.

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