Housing starts recently came in at seasonally adjusted annual rate of 1.6 million, a 21% increase from a year ago. It appears that homebuilding is finally breaking out of its decade-long slumber and showing signs of life. With a shortage of homes, rock-bottom interest rates, and a massive demographic boost, homebuilders are in the perfect environment. One such builder is TRI Pointe Group, Inc. (TPH -3.08%), which despite being one of the smaller and cheaper builders, is reporting strong order growth.
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A big jump in orders
In the fourth quarter, TRI Pointe reported earnings of $0.85 a share, handily beating Street expectations (and fourth-quarter 2019 earnings) of $0.70 a share. Revenue growth was flattish compared with a year ago. Management was happy with the fourth quarter and discussed the expected growth going forward.
"The fourth quarter of 2019 capped another successful year for TRI Pointe Group, highlighted by year-over-year unit order growth of 52%, homebuilding gross margins of 21.9% and earnings-per-share growth of 21%," said TRI Pointe Group Chief Executive Officer Doug Bauer. "Demand was consistent throughout the quarter and broad-based across the country, as each of our brands posted year-over-year order growth in excess of 25%. These results are a testament to the health of our industry and the appeal of our homes."
On the earnings call, TRI Pointe said January orders were up 71% compared to a year ago. While the big increase in interest rates in 2018 affected orders in 2019, those challenges are behind the company. Falling interest rates should positively affect home affordability in the tight markets in California and Washington. Fiscal year 2018 was a fantastic year for the company, driven by high home price appreciation in TRI Pointe's West Coast markets, so 2019 was a bit of a letdown. The company expects to deliver 5,100 to 5,300 homes in 2020, compared to 4,921 in 2019. This year will be back-end loaded, as the company is in a transition phase between older communities selling out and new ones that are still have a lot of building left. Uncertainty about rates, the economy, and interest rates affected the forecast, which was seen as conservative on the conference call.
Strategic moves to diversify exposure and target new segments
TRI Pointe has historically been a luxury/move-up builder concentrated in California. The company has been diversifying its exposure from the West Coast and Mountain States, which have experienced the fastest home price appreciation over the past several years and have become overheated. The West Coast is particularly vulnerable to coronavirus issue, especially as foreign investors exit the market. The company is building its presence in the Mid-Atlantic region, particularly the Carolinas and Maryland. The company has also been lowering average selling prices by building denser communities as a way to entice the first-time homebuyer and the active adult. The company expects the first-time homebuyer to be about 40% of sales in 2020, up from 30%, and active adult will increase to 10% from 3%. TRI Pointe has very little luxury exposure left.
The homebuilding sector has a long runway
Housing starts experienced a big jump recently, increasing 21% compared to a year ago. This increase sounds impressive, until you realize we are just barely back at historic levels. Historic levels don't tell the whole story, however. Take a look at the chart below, which shows housing starts (upper chart) and then housing starts divided by the U.S. population (lower chart). When the population was only 218 million in 2000, 1.6 million starts might have been fine. But today, the United States population is more than 50% larger. With the millennial generation hitting prime home-buying years, the homebuilding sector has its work cut out for it.
US Housing Starts data by YCharts
A cheap stock in a cheap sector
TRI Pointe is currently trading at 9.4 times expected 2020 earnings per share, which is one of the lowest multiples in the sector. The average for the top publicly traded homebuilders is about 10.4, which is a valuation typically associated with peak cycle earnings, not at the end of a bust. Based on the 2020 EPS estimate, the company should experience 11% earnings growth this year, which gives it a P/E-to-growth ratio (PEG) below one. PEG ratios below one are the classic Peter Lynch indicator of an undervalued stock. Based on Street estimates, 2020 sales growth should come in at 8%, which is a rebound from last year's negative 5.4%. Overall, TRI Pointe is a value stock in a sector that is cheap overall.
