The U.S. real estate market continues to see average prices rise year over year. Of course, the largest gains are contained in major cities, where people continue to flock for jobs and culture, pushing demand and prices higher. Housing starts were revised in June 12.3% lower to an annual rate of 1.17 million and both of these companies are doing their best to keep that rate moving higher.
Toll Brothers (TOL, Financial) is the leading luxury home builder and ranked as the No. 1 home builder in the world by Fortune in each of the last four years. With its headquarters just north of Philadelphia, the company serves 50 markets in 20 states.
Over the last 12 months, it booked $584 million in profit on $6.3 billion in revenue. That’s up big since 2009, when Toll Brothers lost $755 million on $1.75 billion in sales, driving book value growth north of 100%. The stock is currently priced lower than its historical averages, and is looking to earn over $5 per share in 2019, push sales north of $8 billion and grow book value to $35 a share on the low end. Based on where the stock traded in the last five years, it could price from $53 to $90, a respectable gain from its current level.
LGI Homes (LGIH, Financial) is on the opposite end of the spectrum from Toll Brothers, offering entry-level homes, both detached homes and townhomes, and “move-up” homes, and a luxury series sold under the Terrata Homes brand, which are built mainly in Texas, Arizona and North Carolina. Home builders use a very similar marketing model. Consumers can choose from a set number of floor plans in each community and build out their own features.
LGI is much smaller than Toll, but continues to impress with its financial performance. Five years ago the company did $22 million in profit on $163 million in sales. This year it’s generated $129 million in net profit on $1.3 billion in sales. Earnings per share and book value have skyrocketed as a result, and it looks to bring in close to $14 a share over the next two years. That’s 24% of its current market capitalization. If the market puts just an industry average price multiple on the stock, it could trade above $125 per share in 2020.
Toll Brothers’ clients are more affluent and less likely to care if interest rates continue to rise, yet the elimination of the state and local deductions in excess of $10,000 will have an impact on the luxury markets most. Since the majority of its revenue comes from California, that may be a drag on growth going forward. LGI is likely to see faster growth, but the metropolitan areas where it’s building the majority of homes would likely experience more downward volatility during the next bear market or recessionary period. And, since some of the homes are sold with no money down, the company is at greater risk of loss than Toll Brothers.
Bottom line, both are worth taking a flyer on. Toll Brothers is likely to be more consistent long term, but in the short term LGI may have more upside potential based solely on its ability to build faster to match market demand.
Disclosure: I am not long/short LGI or Toll.
