Calculating The Fair Value Of Tri Pointe Homes, Inc. (NYSE:TPH)
Tuesday, Nov 12, 2024 2:05 pm ET
2min read Tri Pointe Homes, Inc. (NYSE:TPH) is a prominent homebuilder in the United States, with a market capitalization of $3.94 billion as of November 2024. To evaluate whether TPH is trading at an attractive price, we can calculate its fair value using the Discounted Cash Flow (DCF) method. This analysis will consider key assumptions, such as growth rates and discount rates, and compare the DCF valuation to other valuation methods.
**Discounted Cash Flow (DCF) Valuation**
The DCF method estimates the intrinsic value of a company by discounting future free cash flows to their present value. For TPH, we'll use a two-stage DCF model, with different growth rates for the first ten years and a long-term growth rate thereafter.
1. **Key Assumptions:**
- Discount rate: 8.6% (based on a levered beta of 1.447 and the risk-free rate)
- Long-term growth rate: 2.6% (based on the 5-year average of the 10-year government bond yield)
- Free cash flow (FCF) growth rates for the next ten years: -2.89%, -1.24%, -0.08%, 0.73%, 1.30%, 1.69%, 1.97%, 2.17%, 2.37%, and 2.57%
2. **DCF Calculation:**
- Levered FCF for the next ten years: $380.0m, $326.0m, $316.6m, $312.6m, $312.4m, $314.7m, $318.7m, $324.1m, $330.5m, and $337.7m
- Present value of these FCFs, discounted at 8.6%: $350.0m, $276.0m, $247.0m, $225.0m, $207.0m, $192.0m, $179.0m, $168.0m, $158.0m, and $148.0m
- Terminal value (FCF in 2034 discounted at 8.6%): $5.8 billion
- Total present value: $4.7 billion
**Comparison to Other Valuation Methods**
Relative valuation and asset-based valuation provide alternative perspectives on TPH's fair value. Relative valuation compares TPH's valuation metrics to those of its peers or industry averages. Asset-based valuation focuses on the company's assets and liabilities to determine its worth.
1. **Relative Valuation:**
- TPH's P/E ratio of 8.72 is significantly lower than the industry average of 24.62, suggesting that TPH may be undervalued.
- TPH's EV/EBITDA ratio of 7.21 is also lower than the industry average of 9.35, further indicating potential undervaluation.
2. **Asset-Based Valuation:**
- TPH's book value per share is $34.73, which is higher than its current share price of $42.67, suggesting that the market may be overestimating the company's intrinsic value.
**Conclusion**
The DCF valuation of Tri Pointe Homes, Inc. (NYSE:TPH) suggests that the stock is trading close to its estimated fair value, with a fair value estimate of $50.22 and a current share price of $42.67. However, investors should consider other valuation methods, such as relative valuation and asset-based valuation, to gain a more comprehensive understanding of TPH's fair value. Additionally, investors should monitor changes in key assumptions, such as discount rates and growth rates, to assess the impact on TPH's DCF valuation over time.
**Discounted Cash Flow (DCF) Valuation**
The DCF method estimates the intrinsic value of a company by discounting future free cash flows to their present value. For TPH, we'll use a two-stage DCF model, with different growth rates for the first ten years and a long-term growth rate thereafter.
1. **Key Assumptions:**
- Discount rate: 8.6% (based on a levered beta of 1.447 and the risk-free rate)
- Long-term growth rate: 2.6% (based on the 5-year average of the 10-year government bond yield)
- Free cash flow (FCF) growth rates for the next ten years: -2.89%, -1.24%, -0.08%, 0.73%, 1.30%, 1.69%, 1.97%, 2.17%, 2.37%, and 2.57%
2. **DCF Calculation:**
- Levered FCF for the next ten years: $380.0m, $326.0m, $316.6m, $312.6m, $312.4m, $314.7m, $318.7m, $324.1m, $330.5m, and $337.7m
- Present value of these FCFs, discounted at 8.6%: $350.0m, $276.0m, $247.0m, $225.0m, $207.0m, $192.0m, $179.0m, $168.0m, $158.0m, and $148.0m
- Terminal value (FCF in 2034 discounted at 8.6%): $5.8 billion
- Total present value: $4.7 billion
**Comparison to Other Valuation Methods**
Relative valuation and asset-based valuation provide alternative perspectives on TPH's fair value. Relative valuation compares TPH's valuation metrics to those of its peers or industry averages. Asset-based valuation focuses on the company's assets and liabilities to determine its worth.
1. **Relative Valuation:**
- TPH's P/E ratio of 8.72 is significantly lower than the industry average of 24.62, suggesting that TPH may be undervalued.
- TPH's EV/EBITDA ratio of 7.21 is also lower than the industry average of 9.35, further indicating potential undervaluation.
2. **Asset-Based Valuation:**
- TPH's book value per share is $34.73, which is higher than its current share price of $42.67, suggesting that the market may be overestimating the company's intrinsic value.
**Conclusion**
The DCF valuation of Tri Pointe Homes, Inc. (NYSE:TPH) suggests that the stock is trading close to its estimated fair value, with a fair value estimate of $50.22 and a current share price of $42.67. However, investors should consider other valuation methods, such as relative valuation and asset-based valuation, to gain a more comprehensive understanding of TPH's fair value. Additionally, investors should monitor changes in key assumptions, such as discount rates and growth rates, to assess the impact on TPH's DCF valuation over time.
