DHI vs. TOL: Which Homebuilder Stock is Better?


In this piece, I compared two homebuilder stocks — DHI and TOL — to see which stock is better. D.R. Horton (NYSE:DHI) and Toll Brothers (NYSE:TOL) address opposite ends of the market, with Horton focused on affordable housing and Toll Brothers targeting the luxury end of the market. This fact, along with its valuation and company fundamentals, makes DHI the clear winner.

D.R. Horton (NYSE:DHI)

D.R. Horton is the largest U.S. homebuilder, and it focuses on affordable housing, giving it a clear advantage in the nationwide housing shortage. Additionally, the company’s price-to-sales (P/S) multiple has fallen back to where it stood in 2019, while its P/E ratio is even lower than where it stood then. Finally, Horton’s solid fundamentals suggest a bullish rating may be in order.

Over the last few years, a growing number of reports have indicated that the U.S. has been facing a housing shortage almost since the financial crisis, and it’s only been getting worse. Specifically, that shortage is coming at the affordable end of the market, calling into question the near-term future of luxury homebuilders.

In 2021, government-sponsored mortgage lender Freddie Mac (OTC:FMCC) said the U.S. was short some 3.8 million units in 2020, an increase from 2.5 million in 2018. More recently, supply-chain issues and labor shortages have increased the time that passes between permits being issued and construction beginning.

Horton enjoyed solid revenue and earnings growth even as interest rates climbed in 2022. However, its P/S ratio of 0.95x has plunged to where it stood in 2019, and its P/E ratio of 5.7 is much lower than its five-year average of 10.3x. A bit of good news for the industry is that 30-year mortgage rates are now at their lowest level since September, even as the Fed continued raising its baseline rate. This should also benefit the affordable end of the housing market.

Finally, D.R. Horton has enjoyed solid earnings and sales growth over the last several quarters and years. Revenue has risen from $17.2 billion in Fiscal 2019 to $19.7 billion, $27 billion, and $32.7 billion for 2020, 2021, and 2022, respectively. The company’s stock is up 25.3% over the last six months, suggesting we might have seen the bottom in June 2022.

What is the Price Target for DHI Stock? 

D R Horton has a Moderate Buy consensus rating based on seven Buys, three Holds, and two Sell ratings assigned over the last three months. At $98.60, the average price target for D.R. Horton stock implies upside potential of 4.4%. 

Toll Brothers (NYSE:TOL)

Toll Brothers is focused on luxury housing, which gives pause because the housing shortage is primarily in the affordable end of the market. However, the company has seen solid earnings and sales growth despite the rising interest rates in 2022, suggesting a neutral view might be appropriate, pending additional housing market data.

On one hand, Toll Brothers looks cheap based on its P/E ratio of 5.1x, which is now approaching its recent bottom of around 4.3x in March 2020. On the other hand, its P/S ratio of 0.6x times is about double where it stood in March 2020.

Like Horton, Toll Brothers has enjoyed solid revenue growth, albeit at a slower pace, from $7.1 billion in Fiscal 2020 to $10.3 billion in Fiscal 2022. Unlike Horton, Toll Brothers saw a small disruption in the first year of the pandemic, falling slightly from the $7.2 billion in sales recorded in Fiscal 2019. This suggests a recession could hit Horton harder than its larger counterpart.

What is the Price Target for TOL Stock? 

Toll Brothers has a Moderate Buy consensus rating based on six Buys, two Holds, and one Sell rating assigned over the last three months. At $63.25, the average Toll Brothers stock price target implies upside potential of 13.2%. 

Conclusion: Bullish on D.R. Horton, Neutral on TOL

Uncertainty restrained the housing market in 2022, but things might be looking up. On one hand, home sales plummeted in 2022, falling to an eight-year low in some parts of the country. However, low inventory supported home prices.

Some analysts expect 2023 to be much better for homebuilder stocks. For one, KeyBanc analyst Ken Zener, who successfully called the sector’s performance in 2022, now expects homebuilder stocks to outperform the S&P 500 (SPX) this year.

Nonetheless, D.R. Horton looks better positioned due to its focus on affordable over luxury housing and larger net income margin (17.5% compared to 12.5% for TOL).


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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