2023-05-17 21:17:39 ET
Summary
- Tri Pointe builds and sells innovative single-family homes in 15 markets in ten states and the District of Columbia.
- Considering the words of management in Q1 2023, I assumed that we may see cost reductions, and more demand in the future.
- After the recent rebound in interest rates and low inventory, quarterly guidance from the company includes beneficial market conditions and growth trajectory.
- In my opinion, further cost reductions and increases in the average sales price of homes delivered in Q1 2023 will likely continue, which may drive FCF growth up.
Tri Pointe Homes, Inc. ( TPH ) appears well-positioned to capitalize on high demand in select markets with favorable population growth. I also assumed that targeted pricing and incentive strategies that seemed successful in Q1 2023 would most likely enhance future business performance. Besides, I also think that we may see FCF growth driven by further cost reductions and increases in the average sales price of homes delivered, like in Q1 2023. Even taking into account a potential decline in earnings in 2023, the year 2024 and future years will most likely deliver FCF growth. I believe that the company is very undervalued.
Tri Pointe
Tri Pointe builds and sells innovative single-family homes in 15 markets in ten states and the District of Columbia. Its focus is on delivering innovative designs and high-quality construction in three main regions: West, Central, and East.
Source: 10-K
The company has expanded significantly since its founding in 2009, and now operates in various markets across the country. Tri Pointe is committed to building high-quality, affordable homes to meet the needs of its customers and the changing demands of the housing market.
After carefully reading the most recent quarterly report, in my opinion, Tri Pointe is a good read. In my view, management was really optimistic that many new financial forecasters and investment analysts will want to study future free cash flows. The company noted strong net new home order pace generation thanks to strategic pricing and incentives to clients. In this regard, I believe that the following lines are worth considering.
Our primary goal for the quarter was to boost net new home order pace and volume in response to the macro conditions that dampened both affordability and buyer sentiment through the back half of 2022. Through the implementation of product repositioning, targeted pricing, and incentive strategies, along with solid execution from our teams, we were able to elevate our first quarter absorption rate to 4.0, which is firmly above our pre-pandemic historical seasonal levels. Source: Q1 2023 Quarterly Press Release
With that comment about the recent results, it is worth noting that after the recent rebound in interest rates and low inventory, guidance from the company includes beneficial market conditions and growth trajectory.
As the housing market continues to rebound from the interest rate reset, we continue to believe the supply and demand dynamics are a strong tailwind for the homebuilding industry, particularly during a time where the resale market has softened, and inventory is at historically low levels. Tri Pointe Homes is well positioned to capitalize on current market conditions and continue our growth trajectory. Source: Q1 2023 Quarterly Press Release
For the full year, the Company anticipates delivering between 4,500 and 5,000 homes at an average sales price between $690,000 and $700,000. Source: Q1 2023 Quarterly Press Release
With that, the company delivered beneficial numbers about Q2, which included the delivery of 900-1000 homes, and SG&A/revenue and gross margin a bit lower than what we have seen in the past. Quarterly SG&A/revenue is expected to be close to 12%-13% and gross margin close to 22%-23%.
Source: Q1 2023 Quarterly Press Release
Market Expectations Include A Profitability Rebound In 2024
The numbers reported by other financial forecasters are worth a quick look. Market expectations include a decline in sales growth in 2023, but an increase in 2024. Besides, both EBITDA and EPS are expected to decrease in 2023. With these figures in mind, perhaps we find reasonable entry points in the stock charts around 2023.
As of March 31, 2024, net sales would be close to $3.931 billion, with 2024 EBITDA of $626 million, an operating profit of $463 million, 2024 net income close to $360 million, and 2024 EPS of $3.88 per share.
Solid Balance Sheet
I believe that most investors would appreciate the balance sheet reported by Tri Pointe. The company reports a considerable amount of cash, more than that on December 31, 2022, and some debt. The largest asset is represented by real estate inventories, which are the properties developed by Tri Pointe.
More in particular, as of March 31, 2023, the company reported cash and cash equivalents worth $966, receivables of $141 million, and real estate inventories of close to $3.14 billion. Also, with investments in unconsolidated entities worth $134 million, goodwill and other intangible assets are equal to $156 million. In sum, total assets are equal to $4.739 billion. The asset/liability ratio stands at more than 2x, so I believe that the balance sheet appears solid.
With regards to the total amount of liabilities, Tri Pointe reports accounts payable close to $57 million, accrued expenses and other liabilities of $436 million, loans payable worth $287 million, and senior notes worth $1.091 billion. Total liabilities were equal to $1.872 billion.
Finally, I believe that it is worth noting that most debt obligations report an expected maturity date around 2027 and thereafter. Hence, Tri Pointe may be able to renegotiate its debt terms, or even receive more debt from investors. The weighted average interest rate is close to 5.9%, which does not make me feel uncomfortable.
There Are Competitors Out There, And The Barriers To Entry Are Not that Relevant
Competition in the home construction industry is intense, and there are relatively low barriers to entering the business. Tri Pointe competes for homebuyers, desirable parcels of land, financing, raw materials, and skilled labor. Increased competition could hurt your business, as it could hinder your market share expansion, and cause price pressures on your homes that could negatively affect your margins and revenue. In addition, your competitors may develop land and build housing units superior to or similar to yours, and may have long standing relationships with subcontractors and suppliers in the markets in which they operate.
My Cash Flow Expectations Would Imply A Valuation Of $49.7 Per Share
In my opinion, if management successfully capitalizes on growing demand in selected markets with favorable growth in population and employment, sales will likely trend north. I also expect that management finds locations close to work centers and transportation corridors like it did in the past.
We believe they represent attractive homebuilding markets with opportunities for long-term growth and that we have strong land positions strategically located within these markets. Moreover, our management teams have deep, local market knowledge of the homebuilding and development industries. We believe this experience and strong relationships with local market participants enable us to source, acquire and entitle land efficiently. Source: 10-K
I also assumed that the company will successfully execute marketing, advertising, and promotional strategies, both online and offline, to reach potential buyers. Considering the number of years in the real estate market, I believe that the know-how accumulated will most likely enhance future marketing operations in order to bring sustained revenue growth.
Tri Pointe sells its homes through its own independent sales representatives and real estate brokers. Its inside sales force is trained, and has previous experience of selling new homes in the local market. The company works with consultants and professional service providers to carefully design the exteriors and interiors of each home to meet the needs of potential buyers. Under my DCF model, I assumed that Tri Pointe would be able to find qualified personnel, and the SG&A expenses would not destroy the FCF line. In my view, if the headcount growth continues, and the SG&A/revenue does not increase much, FCF will likely trend north. In my opinion, in the last ten years, headcount growth most likely led to a certain level of economies of scale that I expect in the future.
Considering the words of management in Q1 2023, I assumed that we may see cost reductions, and more demand in the future. I also believe that further expansion of trade resources, and improving the material procurement process will likely improve future profitability.
Going into this year, our strategic focus was to drive orders, cost reductions, and returns. I am pleased to report that we are experiencing well-diversified demand across all buyer segments and geographic markets. Source: Q1 2023 Quarterly Press Release
Regarding cycle times, our teams have been focused on expanding trade resources, improving the material procurement process, and introducing line or phase building in additional markets. These efforts have resulted in a reduction in our cycle times by more than two weeks on average in the first quarter and we believe further improvements are within reach this year. Source: Q1 2023 Quarterly Press Release
Finally, I believe that we may see further increases in the average sales price of homes delivered, which may bring revenue growth, and FCF growth. In the last quarterly report, management noted an average sales price of homes delivered of 9% q/q.
Q1 2023 Quarterly Press Release
My cash flow statement model for 2033 includes 2033 net income close to $2.164 billion, depreciation and amortization of $12 million, and deferred income taxes close to $172 million.
Also, with amortization of stock-based compensation of $23 million, changes in real estate inventories worth $182 million, changes in accounts receivables of -$316 million, and changes in accounts payable of -$240 million, 2033 CFO would be close to $1.375 billion. Besides, with 2033 capex close to -$166 million, 2033 FCF would be close to $1.21 billion.
If we assume a WACC of 8.1% and an impressively low EV/ FCF ratio of 4.9x, the terminal 2033 FCF would be $5.933 billion, and the enterprise value would stand at $5.096 billion. Besides, if we assume cash and cash equivalents close to $966 million and senior notes of $1.091 billion, the equity valuation would be close to $4.971 billion. Finally, the fair price would be close to $49.6 per share.
Several Risks Could Push The Fair Price Down
Lack of success in acquiring parcels of land at reasonable prices, fluctuation of quarterly results due to the seasonal nature of the business, and cyclicality may deteriorate the cash flow statement. If the FCF does not grow sufficiently or increases less than expected, I would expect investors to sell their shares, which may bring lower stock price valuations.
Changes in economic conditions could also reduce the demand for housing, and further increases in interest rates or shortages of raw materials may also diminish the net income. If investors believe that some of these factors are about to deteriorate the results of Tri Pointe, I believe that the demand for the stock could also decline. Finally, lack of skilled labor and risks related to contractors or competition in the industry may also result in diminishing gross margins and lower fair price.
Conclusion
Tri Pointe is a home construction company focused on providing innovative designs and high-quality construction. I believe that the company appears well-positioned to capitalize on high demand in select markets with favorable population and employment growth. In my opinion, further cost reductions and increases in the average sales price of homes delivered in Q1 2023 will likely continue, which may drive FCF growth up. It is important to carefully consider that competition in the home construction industry is intense, and there are relatively low barriers to entering the business. With that, in my view, Tri Pointe appears significantly undervalued by the market right now. I believe that the stock could be worth more than $49 per share.
For further details see:
Tri Pointe: Very Undervalued Single-Family Homes And Great 2024 Expectations