PulteGroup, Inc. (PHM) and KB Home (KBH) are two prominent homebuilders in the United States. PHM acquires and develops land primarily for residential purposes and constructs home designs, including single-family detached, townhomes, condominiums, and duplexes under various brand names. It also provides mortgage financing, title insurance, and other services to home buyers. In comparison, KBH builds and sells various homes, including attached and detached single-family residential homes, townhomes, and condominiums, primarily for first-time, first move-up, second move-up, and active adult homebuyers. It also offers insurance products and title services.
Low mortgage rates coupled with depressed inventory levels amid rising demand in the remote working era led to soaring home prices over the past one and a half years. These, along with rising input prices, led to home prices increasing by 18.8% in 2021. While rising mortgage rates have become a limiting factor this year, rising demand from entry-level homebuyers amid an improving job market and fast declining inventory should keep the housing market red-hot this year as well.
Investors’ interest in this space is evident from the Direxion Daily Homebuilders & Supplies Bull 3x Shares ETF’s (NAIL) 1.6% returns over the past week. The global residential building construction market is expected to grow at a 10.3% CAGR to reach $8.06 trillion by 2025. So, both KBH and PHM should benefit.
PHM is a winner with 1.2% gains over the past week versus KBH’s 0.7% returns. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On March 17, 2022, PHM’s Del Webb brand for active adult communities announced the offering of its Del Webb Southern Harmony in the scenic countryside town of Murfreesboro. Opening in late 2023, the community will contain 1,100 single-family homes that feature an open-concept residents’ clubhouse and an abundance of resort-style amenities at build-out. PHM should witness high demand in the coming months.
On March 11, 2022, KBH announced the grand opening of Butte Vista at Cobblestone, a new, single-family home community in Plumas Lake, California, providing access to the Sacramento area’s major job centers as well as Beale Air Force Base. Surrounded by several public parks, Lake Tahoe, and the Sierra Nevada Mountains, the new community offers year-round outdoor recreation opportunities and world-class resorts. KBH should witness high demand in the coming months.
Recent Financial Results
PHM’s total revenues for the fiscal 2022 second quarter ended January 1, 2022, increased 36.5% year-over-year to $4.36 billion. The company’s pre-tax income came in at $855.92 million, representing a 63.4% year-over-year improvement. Its adjusted net income came in at $637.31 million, up 53.7% from the year-ago period. PHM’s adjusted EPS increased 64.1% year-over-year to $2.51. The company had $1.83 billion in cash, cash equivalents, and restricted cash as of December 31, 2021.
For its fiscal 2022 first quarter ended February 28, 2022, KBH’s total revenues increased 22.5% year-over-year to $1.40 billion. The company’s operating income came in at $169.56 million, indicating a 48.6% year-over-year improvement. Its total pre-tax income came in at $178.06 million, up 44.1% from the prior-year period. While its net income increased 38.3% year-over-year to $134.26 million, its EPS grew 44.1% to $1.47. The company had $240.69 million in cash and cash equivalents as of December 31, 2021.
Past and Expected Financial Performance
PHM’s tangible book value and total assets have increased at CAGRs of 16.1% and 9.5%, respectively, over the past three years.
PHM’s EPS is expected to grow 39.8% year-over-year in fiscal 2022, ending December 31, 2022, and 11.2% in fiscal 2023. Its revenue is expected to grow 19% year-over-year in fiscal 2022 and 10.9% in fiscal 2023. Analysts expect the company’s EPS to grow at a 9.2% rate per annum over the next five years.
KBH’s tangible book value and total assets have increased at CAGRs of 13.8% and 6.2%, respectively, over the past three years.
Analysts expect KBH’s EPS to improve 70.4% year-over-year in fiscal 2022, ending November 30, 2022, and 10.9% in fiscal 2023. Its revenue is expected to grow 29.5% year-over-year in fiscal 2022 and 12.9% in fiscal 2023. Analysts expect the company’s EPS to grow at a 13% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, PHM is currently trading at 0.26x, 160% higher than KBH’s 0.10x. In terms of forward EV/Sales, KBH’s 0.65x compares with PHM’s 0.73x.
Profitability
PHM’s trailing-12-month revenue is almost 2.3 times KBH’s. PHM is also more profitable, with an 18.9% EBITDA margin versus KBH’s 13.2%.
Furthermore, PHM’s ROE, ROA, and ROTC of 27.7%, 12.5%, and 15.8% compare with KBH’s 20.5%, 8.2% and 9.9%, respectively.
POWR Ratings
While PHM has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, KBH has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both PHM and KBH have a C grade for Momentum, consistent with their mixed price performance over the past year. PHM has gained 1.2% over the past week, while KBH has returned 0.7%.
PHM has a B grade for Quality, consistent with its higher-than-industry profitability ratios. PHM’s trailing-12-month net income margin of 14% is 111.4% higher than the industry average. KBH’s D grade for Quality is in sync with its negative levered free cash flow margin.
Of the 24 stocks in the C-rated Homebuilders industry, PHM is ranked #2, KBH is ranked #21.
Beyond what we have stated above, our POWR Ratings system has also rated PHM and KBH for Stability, Value, Sentiment, and Growth. Get all PHM ratings here. Also, click here to see the additional POWR Ratings for KBH.
The Winner
Despite rising mortgage rates, rising demand and declining inventory should keep the housing market hot, benefiting PHM and KBH. However, higher profitability makes PHM a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Homebuilders industry.
PHM shares were trading at $42.13 per share on Thursday afternoon, down $2.21 (-4.98%). Year-to-date, PHM has declined -26.06%, versus a -4.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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