In this piece, I evaluated two homebuilder stocks, Lennar Corp. (NYSE:LEN) and Toll Brothers Inc. (NYSE:TOL), using TipRanks’ comparison tool to determine which is better. So far, the last 12 months have been blockbuster months for both homebuilders. Lennar is up 26% year-to-date and 49% over the last 12 months, while Toll Brothers has gained 30.9% year-to-date and 35.7% over the last year.
Of course, 2022 was a particularly challenging year for homebuilders amid soaring interest rates, which reached a 20-year high, but it looks like Wall Street is already betting on a recovery, despite fear of a recession. Nevertheless, the numbers suggest the homebuilding sector hasn’t recovered yet, as interest rates remain high.
Mortgage purchase applications are down 35% year-over-year, likely because interest rates are now in the 6% to 7% range, on average, versus about 2% to 3% a year ago. The Commerce Department reported that sales of new homes, which more closely impact Lennar and Toll Brothers, are down 17% year-over-year to the lowest seasonally adjusted annual rate in four years. However, it’s looking like new home sales are recovering faster than sales of existing homes.
Between 2000 and the pandemic, new homes accounted for approximately 11% of all home sales, but in 2023, new homes have accounted for 27% so far, an excellent trend for homebuilders. However, with Lennar and Toll Brothers both on such a tear since October, many investors might be wondering if there’s any more upside left, so a closer look is in order.
As a starting point, homebuilders are trading at a price-to-earnings (P/E) ratio of 6.9, versus their three-year average of 8.6, and a price-to-sales (P/S) ratio of 0.97, in line with their three-year average.
Lennar (NYSE:LEN)
At a P/E of around 7.0 and a P/S of 0.95, Lennar initially looks fairly valued versus its industry, especially considering its five-year average ratios are also in line with the industry’s three-year averages. Thus, a neutral view looks appropriate in the near term, although investors with an ultra-long-term horizon might want to consider buying and holding the stock over the long term.
Lennar has been posting some tremendous growth over the last few years. While Lennar’s net income was up only slightly between 2021 and 2022, its revenue growth remained strong, jumping from $26.2 billion in 2021 to $32.9 billion in 2022. The company’s margins and debt levels are also attractive, and it’s generating plenty of free cash flow.
Overall, Lennar is attractively positioned. While upside may be limited in the near term, the shares have more than doubled over the last five years, suggesting the company could be a long-term buy-and-hold. However, a better entry point may appear.
What is the Price Target for LEN Stock?
Lennar has a Moderate Buy consensus rating based on nine Buys, five Holds, and zero Sell ratings assigned over the last three months. At $117, the average Lennar stock price target implies upside potential of 2.1%.
Toll Brothers (NYSE:TOL)
At a P/E of 5.7 and a P/S of 0.7, Toll Brothers initially looks undervalued versus its industry and its own five-year average P/E of 9.3 and P/S 0.7. However, the company’s financials are solid but not quite as glowing as Lennar’s numbers, suggesting a neutral view might be appropriate.
One concern is that Toll Brothers tends to issue almost as much debt as it repays every year, suggesting a more tentative position that could change suddenly if the housing market crashes. The company recently announced multiple project openings, so it is putting that capital to work.
Additionally, Toll Brothers doesn’t generate as much free cash flow as Lennar, although its revenue has been growing steadily, as has its net income. The company’s valuation ratios also aren’t as attractive as Lennar’s. Importantly, Toll Brothers is up less than 60% over the last five years, underperforming LEN, so the neutral view assigned is for both the near and long term.
What is the Price Target for TOL Stock?
Toll Brothers has a Moderate Buy consensus rating based on six Buys, three Holds, and one Sell rating assigned over the last three months. At $68.22, the average Toll Brothers stock price target implies upside potential of 3.6%.
Conclusion: Neutral-to-Bullish on LEN, Neutral on TOL
With homebuilder stocks, especially names that have rallied as much as Lennar and Toll Brothers recently, it’s important to consider both the near and long term. In short, there’s really nothing to dislike about Lennar, so it looks fairly valued in the near term, although it could post solid gains over the long term, especially if a better entry point appears.
Meanwhile, Toll Brothers typically trades below its industry and has relatively little five-year growth, so it looks fairly valued on both a near- and long-term basis.
