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

Nearly two years now, I have been quite bullish on the housing market in general. One of the firms that I have been bullish on pretty consistently, even longer than the time that I have been bullish on the housing market in general, has been Tri Pointe Homes (NYSE:TPH). Back in June of this year, I reaffirmed the company as a ‘buy’ candidate. This was based on the impressive growth that the business had experienced and how shares were priced. Since then, the stock is up 9.6% while the S&P 500 is up only 0.8%. But my very first ‘buy’ rating on the company came in June 2022. Since then, shares are up a whopping 104.9%. That dwarfs the 37.9% increase seen by the S&P 500 over the same window of time.

You would think that such massive upside would eventually necessitate a downgrade. But in this case, you’d be wrong. There are a couple of indicators about the company that have me slightly concerned. But on the whole, the business is doing quite well. Revenue, profits and cash flows are all up materially year over year. On top of this, shares are cheap, both on an absolute basis and relative to similar enterprises. Add all of this together, and I do believe that keeping the company rated a ‘buy’ is logical at this point in time.

Still building value

Fundamentally speaking, things are going quite well for Tri Pointe Homes right now. When I last wrote about the company, we had data covering through the first quarter of 2024. But results now extend through the second quarter of the year. During that quarter, revenue for the business was $1.15 billion. That represents a 37.9% increase over the $837.3 million the company generated just one year earlier. This was in spite of the fact that the average price of a home delivered dropped from $698,000 to $666,000. The big driver, then, was a surge in the number of deliveries from 1,173 homes to 1,700 homes.

This jump in revenue for the company brought with it higher profitability as well. Net income nearly doubled from $60.7 million to $118 million. Such a move higher on the bottom line is made possible in spite of the price decreases per home because the increased volume made possible the spreading out of fixed costs over additional revenue. For instance, general and administrative costs declined from 6.6% of total homebuilding revenue to 6%. The company also enjoyed a reduction in sales and marketing costs from 5.2% of homebuilding revenue to only 5%. On top of this, cost of home sales dropped from 78.8% of homebuilding revenue to just 76.1%. All of these small improvements year over year had a big impact on the company’s bottom line.

Other profitability metrics for the business also improved. As an example, EBITDA for the company jumped from $129.9 million to $216 million. Some might point out that operating cash flow worsened rather significantly. That is true. It fell from $62.1 million to $23.2 million. But if we adjust for changes in working capital, we get a sizable rise from $83.9 million to $128.6 million.

In the chart above, you can see results for the first half of 2024 compared to the first half of 2023. As was the case in the second quarter, revenue, profits, and most cash flow figures, were all up year over year. The company benefited materially from a rise in deliveries from 2,238 homes to 3,093 homes. Unfortunately, some of that improvement was offset by a decline in the average price charged for a home delivered from $709,000 to $663,000. Fortunately, that did not stop the company from the bottom line improvements I already mentioned.

This is not to say that everything regarding the enterprise has been great. There are a couple of metrics that have been slightly discouraging to me. The first of these is backlog. This represents the total number of homes that have been ordered by customers. During the most recent quarter, this number came in at 2,692 homes. But at the same time last year, it totaled 2,765 homes. It’s also down from the 2,741 homes that the company reported for the first quarter of this year. I do know that home construction data has been depressed because of high interest rates and inflationary pressures. In the near term, this could continue to be an issue. But in the long run, I fully expect growth for the business and the industry as a whole. After all, estimates vary, but it’s believed that there are between 4 million and 7 million fewer homes than what this country needs. As long as some big gap persists, the picture will be positive for homebuilders.

Even though backlog has fallen, we have seen cancellation rates come back down to earth compared to where they were the last few years. In 2022, for instance, Tri Pointe Homes had a cancellation rate of 19%. That was up from 8% seen in 2021. But by industry standards, even that 19% was quite low. There have been some homebuilders with cancellation rates well above that. In the most recent quarter, the cancellation rate was only 9%. That is up from the 8% reported one year earlier. But I’m not going to get concerned about such a small increase. If we start seeing this 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 that are not cancelled. In the first quarter of this year, the company enjoyed net new orders totaling 1,814 homes. That’s a nice improvement over the 1,619 homes reported the same time last year. But in the most recent quarter, that has flipped. The company reported net new orders of only 1,651 homes. That’s 13.7% below the 1,912 homes ordered the same time last year. It also means that net new orders for the first half of this year as a whole are down to 3,465 homes compared to the 3,531 homes reported last year. In the latest earnings conference call, management did not really provide much in the way of detail here. The only thing they said was that, toward the last few weeks of the most recent quarter, they started seeing improvements as mortgage rates dropped below 7%. But we won’t know until the third quarter data comes out what this will ultimately look like.

We don’t really know what to expect for the rest of this year. But if we annualize 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 shares are priced on a forward basis in the chart above. That chart also values the company using results for 2023. On an absolute basis, I would say that shares are attractively priced. I would even say that they are marginally attractively priced if we were to use the 2023 figures. Relative to similar enterprises, they are also appealing. In the table below, I 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 prospect was the cheapest of the group.