Comparing 3 Homebuilder Stocks

In recent months, we have seen large variability in the homebuilding industry. In the most recent report from the U.S. Commerce Department, existing home sales in August fell 2% as supply remained tight, with key numbers moving in opposite directions compared to a year ago—a decrease of 13.4% in housing inventory and an increase of 14.9% in median house prices. The frenetic demand for homes was fueled by the coronavirus pandemic, but signs are showing that this demand and the corresponding surge in house prices appear to be decelerating. As the housing market boomed early in the pandemic, primarily for single-family homes, total home sales increased as resales fell. Sales of existing homes account for the bulk of U.S. home sales. The rise in existing home prices is expected to slow as the housing inventory shortage eases and demand moderates.

The increased demand for homes in the suburbs and other low-density areas far outpaced supply, leading to bidding wars. The industry fundamentals remain strong, including funding from the U.S. government, improved wages in the labor market and continued low interest rates.

Let’s take a look at the financials of 3 leading homebuilders to see if we can pick a winner

D R Horton Inc (DHI)

D.R. Horton mainly builds single-family detached homes (over 90% of home sales revenue) and offers products to entry-level, move-up, luxury buyers and active adults. The homebuilding divisions are primarily engaged in the acquisition and development of land and the construction and sale of residential homes. The company’s 55 homebuilding divisions are aggregated into six segments: East Region, South Central Region, Midwest Region, West Region, Southwest Region and Southeast Region. The Forestar segment is a residential lot development company with operations in 55 markets across 22 states. The company offers homebuyers mortgage financing and title agency services through its financial services segment.

Due to lower-than-expected closing volume, partially offset by an expected increase in the average sales price of homes closed during the quarter, the company now expects its fourth-quarter consolidated revenues to be in a range of $7.7 billion to $7.9 billion compared to the prior range of $7.9 billion to $8.4 billion. As strong new home demand and limited housing supply continue to support pricing power across most of its operating footprint, the company now expects its fourth-quarter home sales gross margin to be in the range of 26.5% to 26.8%. This is an improvement from the previous range of 26.0% to 26.3%.

The company reported positive earnings surprises in the prior two quarters. Over the last month, the consensus earnings estimate for the third quarter has decreased from $3.51 to $3.42 per share based on 10 downward revisions. Three months ago, the consensus earnings estimate was $3.06 per share

LGI Homes Inc (LGIH)

LGI is engaged in the design, construction and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia, Virginia and Pennsylvania

The company reported second-quarter revenues of $792 million, up 64.3% from $482 million in the year-ago quarter. The company reported quarterly diluted earnings per share of $4.71. LGI Homes does not currently pay a dividend.

Toll Brothers Inc. (TOL)

Toll Brothers Inc is the leading luxury homebuilder in the U.S. with an average sales price well above public competitors’ prices. It is engaged in designing, building, marketing, selling and arranging financing for detached and attached homes in luxury residential communities. The company operates through two segments: traditional homebuilding and urban infill. The traditional homebuilding segment builds and sells homes for detached and attached homes in luxury residential communities located in affluent suburban markets and caters to move-up, empty-nester, active-adult, affordable luxury and second-home buyers in the U.S.

Earnings have jumped 47% in the last 12 months. Analysts are starting to improve their earnings forecast for the next 12 months too, increasing estimates from $5.80 to $6.18

The stock is trading on a forward PE of just 6.4 so represents good value and the company is running a Return-On-Equity of 13%, which is ok but not great.


Picking a winner from these 3 is actually quite hard. They have all benefitted from the increase in demand for new homes since Covid changed the way we live. All three have shown similar levels of growth.

TOL and DHI pay dividends but LGIH does not. This makes these two slightly more favourable in our eyes, and out of the two we tend to favour TOL slightly more. But it is a close run thing and just goes to show the industry a company operates in makes a bigger difference than individual companies within the industry.