The U.S. Census Bureau and U.S. Department of Housing and Urban Development released the latest figures for new home sales at the end of October. September sales, while down slightly from August, were still 32% above the same month in 2019. Contract signings were up 20.5% year over year. Despite continuing joblessness that exceeds the depths of the 2008-2009 financial crisis and a pandemic that continues to disrupt daily life, housing has been red hot all summer thanks mostly to record-low interest rates.
With housing sales robust, you might expect the stocks of U.S. homebuilders D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), and PulteGroup (NYSE:PHM), to be near all-time highs. If you guessed that, you’d be right. What you might not guess is that even near all-time highs, these stocks are absurdly cheap. Investors have to be cautious, though. Homebuilder stocks can be deceiving, trading at extremely low price-to-earnings multiples during the good times, and lofty ones during a downturn.
A better tool to analyze valuation for homebuilders is the enterprise value (EV)-to-EBITDA ratio — the company’s market cap plus debt divided by earnings before interest, taxes, depreciation, and amortization. This ratio allows us to compare the value of a company to its cash earnings without the confusion of non-cash expenses. Let’s take a closer look at these three absurdly cheap homebuilder stocks.
1. D.R. Horton
D.R. Horton is America’s largest homebuilder by market cap and accounts for 17% market share of U.S. housing sales. The company employs a strategy of consistently selling homes rather than building houses with the highest profit margins. This approach has led to the nickname “the Walmart of builders.” In the most recent quarter, the average sales price for the company’s homes was $296,450. This emphasis on entry-level homes — many between $120,000 and $150,000 — has served D.R. Horton well in the current environment, where affordable houses are hard to find.
For the nine months ended June 30, net income increased to $13.5 billion, an 11% increase from $12.2 billion last year. The number of homes closed increased 10% year over year and the sales order backlog increased 41%, indicating the demand will not wane anytime soon. The EV-to-EBITDA ratio for various industries of the S&P 500 ranged from 12 (utilities and communication) to 19 (consumer discretionary). On that comparison, and the company’s recent history, D.R. Horton is cheap.
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