TPH Stock Study (9-14-23)

I recently did a stock study on Tri Pointe Homes Inc. (TPH) with a closing price of $29.19.

M* writes:

     > Tri Pointe Homes Inc is an American construction company that
     > focuses on residential construction. The company designs and
     > builds single-family homes and condominiums through its portfolio
     > of six regional housing brands. Its largest regional brands
     > include Maracay Homes, which operates in Arizona, and TRI Pointe
     > and Pardee Homes, which operate in California, Nevada, and
     > Colorado. From a geographic perspective, California is TRI
     > Pointe’s largest source of revenue, followed by Arizona and
     > Nevada. The company also operates in Texas, Oregon, and
     > Virginia. TRI Pointe completes approximately 4,000 homes
     > annually with an average selling price around $500,000. TRI
     > Pointe also is involved in the sale and development of land.

Since 2014 (’13 excluded due to fractional EPS and substantially lower sales), this medium-size company has grown sales and earnings at annualized rates of 10.5% and 26.1%, respectively. Lines are mostly up, straight, and parallel except for a sales decline in ’19 and EPS declines in ’16 and ’19. PTPM leads peer averages but lags the industry while trending up from 7.5% to 17.8% in ’23 with a last-5-year mean of 13.0%.

Also since 2014, ROE lags peer and industry averages despite trending up from 6.6% to 21.3% in ’23 with a last-5-year mean of 15.0%. Debt-to-Capital is less than peer and industry averages while trending down from 44.6% in ’14 to 33.9% in ’23 with a last-5-year mean of 37.5%.

Quick Ratio is an impressive 4.8 and Value Line gives a B+ rating for Financial Strength. M* provides no Interest Coverage number for the company, but I doubt the existence of any liquidity concerns with a Current Ratio of 18.7.

With regard to sales growth:

• CNN Business projects contraction of 18.6% YOY and 4.8% per year for ’23 and ’22-’24 (based on 7 analysts).
• YF projects YOY 14.8% contraction and 16.3% growth for ’23 and ’24, respectively (5 analysts).
• Zacks projects YOY 15.9% contraction and 15.4% growth for ’23 and ’24, respectively (3).
• Value Line projects 0.7% annualized contraction from ’22-’27.
• CFRA projects contraction of 15.4% YOY and 0.7% per year for ’23 and ’22-’24, respectively (5).
• M* gives a 2-year ACE of 1.8% annualized contraction.

I am forecasting just below the long-term estimate at -1.0% per year.

With regard to EPS growth:

• CNN Business projects contraction of 42.1% YOY and 17.7% per year for ’23 and ’22-’24, respectively (based on 7 analysts), along with 5-year annualized growth of 2.3%.
• MarketWatch projects annualized contraction of 9.1% and 5.4% for ’22-’24 and ’22-’25 (7 analysts).
• Nasdaq.com projects annualized growth of 18.0% and 12.0% for ’23-’25 and ’23-’26 [2/2/1 analyst(s) for ’23/’25/’26].
• Seeking Alpha projects 4-year annualized growth of 2.3%.
• YF projects YOY 42.2% contraction and 31.9% growth for ’23 and ’24, respectively (7), along with 5-year annualized contraction of 0.6%.
• Zacks projects YOY 44.0% contraction and 26.8% growth for ’23 and ’24, respectively (2), along with 5-year annualized growth of 13.0%.
• Value Line projects 5.6% annualized contraction from ’22-’27.
• CFRA projects contraction of 41.3% YOY and 12.5% per year for ’23 and ’22-’24, respectively (6).
• M* projects long-term annualized growth of 13.0%.

I am forecasting below the 6-long-term-estimate mean (4.1%) at 2.0% per year, which is nowhere near the bottom of the range. I will use 2023 Q2 EPS of $4.76/share (annualized) as the initial value rather than ’22 EPS of $5.54.

My Forecast High P/E is 6.0. High P/E has trended down from 34.5 in ’14 to 5.1 in ’22 with a last-5-year mean of 8.6. The last-5-year-mean average P/E is 6.5. I am forecasting below the latter.

My Forecast Low P/E is 4.0. Low P/E has trended down from 21.7 in ’14 to 2.6 in ’22 with a last-5-year mean of 4.5. I am forecasting near the bottom of the range [only ’22 and ’20 (2.7) are lower].

My Low Stock Price Forecast (LSPF) of $23.50 is default based on $4.76/share initial value. This is 34.9% less than the previous closing price but 30.1% above the 52-week low.

These inputs land TPH in the SELL zone with a U/D ratio of 0.2. Total Annualized Return (TAR) is 1.4%.

PAR (using Forecast Average—not High—P/E) is -2.2%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead but even that is much lower than the current yield on T-bills.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 21 studies (my study and 6 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 8.8%, 10.0%, 7.0, and 4.5, respectively. I am lower across the board. Value Line’s projected average annual P/E of 12.0 is much higher than MS (5.8) and mine (5.0).

MS high / low EPS are $8.39 / $4.76 vs. my $5.26 / $4.76. My high EPS is lower due to a lower growth rate. Value Line projects $4.15/share for high EPS, which is lower than both.

MS Low Stock Price Forecast (LSPF) of $18.00 implies a Forecast Low P/E of 3.8, which is less than the above-stated 4.5. MS LSPF is 16.0% less than the default $4.76/share * 4.5 = $21.42, which results in more conservative zoning. MS LSPF is also 5.3% less than mine.

My TAR (over 15.0% preferred) is far less than MS 16.0%, which confirms a robust MOS behind the current study. Corroborating the small MS sample size is Value Line’s projected forecast high price. MS has $8.39 * 7.0 ~ $59.00: near the top of Value Line’s ’26-’28 projected range at $60.00. I am worlds apart at $31.50/share.

I track a few different [conflicting] valuation metrics. PEG is 0.7 and 3.0 per Zacks and my projected P/E: undervalued vs. overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is fair at 1.0. Kim Butcher’s “quick and dirty DCF” prices the stock at 11.0 * [$4.50 – ($0.00 + $0.15)] = $47.85, which suggests the stock to be 39.0% undervalued.

I am not surprised to see TPH far from the BUY zone given a 72% run-up over the past year. Despite projecting average long-term returns (vs. my 1.4% TAR), the Value Line analyst agrees this is probably a stock to avoid at the current quotation.