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Lennar or D.R. Horton: Which is a Better Housing Pick Now?

Zacks

Post a sharp sell-off in the second half of 2018, declining mortgage rates and solid economic fundamentals have been adding strength to U.S. homebuilding companies like Lennar Corporation LEN, D.R. Horton, Inc. DHI, PulteGroup, Inc. PHM and Toll Brothers, Inc. TOL. Builders remain optimistic about the housing industry’s prospects, given rising wages, lower unemployment and decreased borrowing costs.

Given the current scenario, quality homebuilding stocks could offer a safe haven because of their stability and the fact that these are fundamentally strong enough to withstand the industry woes.
Among the industry bellwethers, Lennar and D.R. Horton are the most prominent ones.

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?

In terms of market capitalization, the two companies are almost neck to neck. With a market cap of $17.4 billion, D.R. Horton 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.

The company is primarily engaged in the acquisition and development of land, and construction and sale of residential homes. D.R. Horton is fast acquiring homebuilding companies in desirable markets. Its recent acquisitions were that of Westport Homes, Classic Builders and Terramor Homes. Courtesy of these buyouts, the homebuilder acquired approximately 700 homes in inventory, 4,500 lots and control of approximately 4,300 additional lots through land purchase contracts. It also acquired a sales order backlog of approximately 700 homes. Westport Homes operates in Indianapolis and Fort Wayne, Indiana, and Columbus, Ohio; Classic Builders operates in Des Moines, Iowa; and Terramor Homes operates in Raleigh, North Carolina.

Conversely, Miami-based Lennar — with a market cap of $15.9 billion — operates as a homebuilder, primarily under the Lennar brand in the United States, targeting first-time, move-up, and active adult homebuyers. The company provides mortgage financing and related services to customers through the financial services segment. Lennar’s acquisition of CalAtlantic Group Inc. in February 2018 made it one of the country’s largest homebuilders in the top U.S. markets.

YTD Stock Performance

D.R. Horton and Lennar have gained 38.4% and 28.4%, respectively, so far this year. The Homebuilding industry has collectively gained 32.1% during the period. Hence, D.R. Horton fared much better than Lennar in this parameter.


Earnings Growth Rate & Surprises

The ability to consistently boost profit levels defying industry woes is a defining characteristic of the best companies. Analysts expect D.R. Horton’s earnings to grow at a 11% rate over the next three to five years. Comparatively, Lennar’s earnings are expected to grow 8.6% over the same time frame. Hence, D.R. Horton’s higher growth rate implies greater potential for capital appreciation.

D.R. Horton is expected to witness 2% y/y earnings growth whereas Lennar’s earnings are expected to decline 16.4% in the current year.

Hence, D.R. Horton is a clear winner in terms of earnings growth expectation.

Meanwhile, considering a more comprehensive earnings history, Lennar delivered a positive surprise in three of the last four quarters, while D.R. Horton came up with positive surprises in two of the trailing four quarters. Lennar has a superior average earnings surprise of 8.5% compared with D.R. Horton’s 5.9%.

Profitability and Returns

Profitability and returns are a measure of the quality of a company’s business and growth opportunities. Return on Capital (ROC) of Lennar is 7.4%, while that of D.R. Horton and the homebuilding industry is 12.3% and 8.7%, respectively. This signifies that D.R. Horton’s business generates a higher return on investment than Lennar’s.

Return on Equity (ROE) is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE in the trailing 12 months for Lennar and D.R. Horton is 12% and 16.7%, respectively. While Lennar has met the industry level of 12%, D.R. Horton has an edge here.

Valuation

Let’s have a look at the stocks’ P/E, P/B and P/S ratios compared with the homebuilding industry.
The trailing 12-month price-to-earnings (P/E) multiple for Lennar and D.R. Horton is 9.3 and 11.5, respectively, while that of the industry is 9.6. Lennar’s shares are cheaper than D.R. Horton.

Again, trailing 12-month price-to-book (P/B) multiple for Lennar is 1.06 compared with 1.81 for D.R. Horton. The industry’s P/B is 1.17x.

Trailing 12-month price-to-sales (P/S) multiples for Lennar and D.R. Horton are 0.75 and 1.06, respectively, compared with the industry’s 0.79.

Lennar is the cheaper of the two stocks on a P/E, P/B and P/S 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 and D.R. Horton have a beta of 1.14 and 1.08 — above 1 — considering the ongoing housing market headwinds.

Bottom Line

D.R. Horton — a Zacks Rank #2 (Buy) stock — appears to be a comparatively better investment option than the Zacks Rank #3 (Hold) Lennar. D.R. Horton is also better than Lennar in terms of earnings growth expectation and share price performance. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Nonetheless, both the companies remain positive about the overall homebuilding market, which will continue to gain on solid demand for homes, favorable job market and strength in economy, defying industry woes.

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