Critical Comparison: D.R. Horton, Inc. (DHI) vs. HSBC Holdings plc (HSBC)

D.R. Horton, Inc. (NYSE:DHI) shares are up more than 43.59% this year and recently increased 0.65% or $0.32 to settle at $49.77. HSBC Holdings plc (NYSE:HSBC), on the other hand, is down -5.77% year to date as of 09/12/2019. It currently trades at $38.74 and has returned 5.27% during the past week.

D.R. Horton, Inc. (NYSE:DHI) and HSBC Holdings plc (NYSE:HSBC) are the two most active stocks in the Residential Construction industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect DHI to grow earnings at a 13.00% annual rate over the next 5 years.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. D.R. Horton, Inc. (DHI) has an EBITDA margin of 12.62%. This suggests that DHI underlying business is more profitable DHI’s ROI is 12.90% while HSBC has a ROI of 6.00%. The interpretation is that DHI’s business generates a higher return on investment than HSBC’s.

Cash Flow

If there’s one thing investors care more about than earnings, it’s cash flow. DHI’s free cash flow (“FCF”) per share for the trailing twelve months was +1.12. Comparatively, HSBC’s free cash flow per share was +1.39. On a percent-of-sales basis, DHI’s free cash flow was 2.58% while HSBC converted 7.47% of its revenues into cash flow. This means that, for a given level of sales, HSBC is able to generate more free cash flow for investors.

Financial Risk

DHI’s debt-to-equity ratio is 0.36 versus a D/E of 0.74 for HSBC. HSBC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

DHI trades at a forward P/E of 10.86, a P/B of 1.92, and a P/S of 1.08, compared to a forward P/E of 10.76, a P/B of 0.92, and a P/S of 2.89 for HSBC. DHI is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. DHI is currently priced at a -3.55% to its one-year price target of 51.60. Comparatively, HSBC is -9.51% relative to its price target of 42.81. This suggests that HSBC is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. DHI has a beta of 1.02 and HSBC’s beta is 0.71. HSBC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. DHI has a short ratio of 3.03 compared to a short interest of 2.65 for HSBC. This implies that the market is currently less bearish on the outlook for HSBC.

Summary

HSBC Holdings plc (NYSE:HSBC) beats D.R. Horton, Inc. (NYSE:DHI) on a total of 7 of the 14 factors compared between the two stocks. HSBC is growing fastly and has a higher cash conversion rate. In terms of valuation, HSBC is the cheaper of the two stocks on an earnings and book value, HSBC is more undervalued relative to its price target. Finally, HSBC has better sentiment signals based on short interest.