Tri Pointe Homes

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Tri Pointe Homes, Inc. is a large homebuilder that designs, constructs, and sells single-family homes in the United States. However, the business faces headwinds in the current economic climate because of rising interest rates, high inflation, and a potential recession.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Tri Pointe Homes (TPH) is a major player in the US homebuilding sector, operating in ten states across the Mountain West, South East, and the West Coast Regions. The company focuses primarily on the design, construction, and sale of single-family homes, as well as the development and sale of land.

Geographic Diversification: TPH has established a significant presence in several key housing markets. They divide their market up into several segments: (West: Northern California, Southern California and Washington), (Central Region: Colorado and Texas) and (East region: District of Columbia, Maryland, North Carolina, South Carolina and Virginia). This diversified approach helps mitigate regional economic risks.
Product Offerings: TPH offers a range of homes, from entry-level to luxury homes, catering to diverse home buyer preferences and price points.
Core operations and revenue: TPH operates in two main segments, homebuilding, and financial services. The Homebuilding segment is by far the largest component of their business. It encompasses home sales revenues, land sales and other related items like warranties and model home leases. The Financial services segment contributes a relatively small share of revenue and is focused on mortgage financing and title insurance operations for home buyers.
Business Strategy: TPH emphasizes building master planned communities, that have a planned set of amenities. They emphasize having a large footprint and also design houses to a specific type of demographic that has been heavily researched. They also are building sustainable, energy-efficient homes.

Industry Trends and Competitive Landscape

Industry Cyclicality: The homebuilding industry is highly cyclical, with performance heavily influenced by macroeconomic factors such as interest rates, economic growth, consumer confidence, and demographic trends. The housing market goes through periods of boom and bust.
Competition: The housing market is highly competitive and is filled with many local and national homebuilders. Competitors can range from large national homebuilders to smaller regional builders and specialized builders, which makes it hard to have a competitive advantage.
Current Headwinds: High mortgage rates are dramatically impacting the affordability of homes for buyers, making it hard to sell the inventory. Furthermore, higher labor and material costs are putting pressure on profit margins. High inflation further decreases consumer spending power.

Financial Analysis

Important Note: The following data is extracted from the most recent filings for the end of the year 2023 unless specified otherwise. The market cap of TPH at time of writing is approximately $1.9 billion.

Revenues: TPH’s revenue in 2022 totalled $5.238B, an increase from $4.696B in 2021. The company’s sales are driven mainly by new homes sales.
Gross Profit: Gross profit has decreased drastically from $1.036B in 2021 to $739.8 million in 2022. Their gross margin also decreased by 600 basis points to 14.1% in 2022 from 20.2% in 2021. This fall in gross profit and margins demonstrates the challenges that the company is currently facing in the high inflation and increased interest rate environment. They are also experiencing the need to provide incentives to move existing inventories.
Operating Expenses: Sales and marketing expenses have increased to 443.2 million from 375.8 million in 2021. The rise in operating expenses shows that the company is having to spend more on marketing. Furthermore, the lack of demand in homes could push them to cut prices to further reduce revenues and margins.
Net Income: TPH’s Net income saw a huge drop off from $401.1M in 2021 to $177.1 million in 2022. This decrease in income is also caused by the increase in operating expenses and the large drop off in the gross margin.
Cash Flow: Despite all the issues related to the drop-in income, cash from operations remained relatively healthy, increasing to $168M in 2022 from 144M in 2021. Free cash flow was $128 million in 2022, an increase of $113 million compared to 2021.
Balance Sheet: The balance sheet is very strong with cash and cash equivalents being $375M, a sizeable inventory of land and construction assets valued at approximately $3.9 billion.
Debt: TPH has a decent amount of debt with total liabilities over 3 billion. However, the debt is spread out over the years with no specific major liabilities in the short term. The companies main problem is its inability to convert its inventories of land and assets into sales and revenue.
2023 10Q report: The 10Q report shows further decrease in the profitability and revenues of the company compared to last year. TPH had a loss of $11.9M in the first quarter of 2023, compared to the profit of 65.8M at the end of Q1 of 2022. Home sales revenues have declined from $1.057 billion to $694 million. They had an increased average home price and a reduction of homes closed. The company saw increased interest expenses on inventory and decreased demand.

Moat Assessment

Moat Rating: 2 / 5 The rating for this business is low because the business does not have durable competitive advantages to protect it. The housing business is very competitive and is subject to major economic forces, making it hard to generate a significant economic moat.
Intangible assets: TPH has established strong reputations in some areas. However, these brands are only local and do not have enough strength to garner a moat.
Switching Costs: There are virtually no switching costs for customers, since each home is a unique transaction, and it is very easy for buyers to switch builders for the next purchase.
Network Effect: There are no network effects to the homebuilding business, as it is typically a one-time transaction.
Cost advantages: Due to the nature of the housing business, companies with unique location advantage or low raw material cost could build a cost moat. However, TPH does not have a clear cost advantage and is often similar to its peers.

Legitimate Risks to the Moat and Business Resilience

Interest Rate Hikes: Increased mortgage rates can significantly reduce housing affordability and demand, impacting TPH’s profitability and revenue.
Economic Downturn: A recession can lead to job losses, decreased consumer confidence, and a further decrease in housing sales.
Inflation: Rising costs for labor, materials, and financing can increase construction expenses, squeezing profit margins.
Competition: Intense competition within the homebuilding industry could result in pricing pressures and decreased market share.
Overreliance on debt: The company relies on debt to finance projects, which could become a risk in an environment of rising rates.
Inventory risk: Because the housing market is very cyclical and there is a long lead time between acquiring land and selling the homes, a downturn in the market can lead to high inventories and write-offs.

Management’s Thoughts and Recent Developments

In their earnings calls, management has talked about the recent downturn in demand in some regions, but maintains that they are still getting favorable contracts. They also acknowledged the need for incentivizing the sales. They are trying to be more targeted in their customer base and focus on selling the right product at the right time.
Management is also focusing on the long term, and believe that the housing shortage will benefit them as the demand recovers. They are focused on reducing costs where they can and working on new designs to meet customer needs and bring new buyers into the market.

Understandability: 2 / 5

The homebuilding business itself is relatively straightforward to understand; build houses, and sell them for profit. However, all the factors that lead to a housing boom or bust are incredibly complex and hard to predict. There is a lack of stability in the business since so many factors are outside of the company’s control. Therefore, a deep understand of economic concepts and housing business is required to really understand TPH.

Balance Sheet Health: 3 / 5

The balance sheet of TPH is decent with a large amount of land and building assets on the asset side, which gives the company stability. However, its liabilities are also fairly high which could pose a problem if they have to liquidate the land at unfavorable prices. Moreover, they need their assets to sell at reasonable prices to create profits, which is increasingly difficult with the ongoing high interest rate environment.

In conclusion, TPH is a large and diverse home building company with a national reach. However, they have a very small moat due to the highly competitive nature of the business and are particularly vulnerable to external risks. The business has a good balance sheet, and have had a good track record of growth, but they may be impacted by external factors.