3 Reasons to Avoid TPH and 1 Stock to Buy Instead

Tri Pointe Homes’s stock price has taken a beating over the past six months, shedding 24.4% of its value and falling to $31.55 per share. This may have investors wondering how to approach the situation.

Is now the time to buy Tri Pointe Homes, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Tri Pointe Homes Will Underperform?

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than TPH and a stock we'd rather own.

1. Backlog Declines as Orders Drop

Investors interested in Home Builders companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Tri Pointe Homes’s future revenue streams.

Tri Pointe Homes’s backlog came in at $1.31 billion in the latest quarter, and it averaged 6.9% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for Tri Pointe Homes, its EPS declined by more than its revenue over the last two years, dropping 9.5%. This tells us the company struggled to adjust to shrinking demand.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Tri Pointe Homes’s margin dropped by 8.8 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Tri Pointe Homes’s free cash flow margin for the trailing 12 months was 11.5%.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Tri Pointe Homes, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 10.2× forward P/E (or $31.55 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.

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