Tri Pointe Homes trades at $44.23 and has moved in lockstep with the market. Its shares have returned 18.3% over the last six months while the S&P 500 has gained 14.2%.
Is there a buying opportunity in Tri Pointe Homes, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.We don't have much confidence in Tri Pointe Homes. Here are three reasons why we avoid TPH and a stock we'd rather own.
Why Is Tri Pointe Homes Not Exciting?
Established in 2009 in California, Tri Pointe Homes (NYSE:TPH) is a United States homebuilder recognized for its innovative and sustainable approach to creating premium, life-enhancing homes.
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 $1.73 billion in the latest quarter, and it averaged 11.4% 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
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Tri Pointe Homes, its EPS declined by 2.3% annually over the last two years while its revenue grew by 5.6%. This tells us the company became less profitable on a per-share basis as it expanded.
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 13.2 percentage points over the last five years. Tri Pointe Homes’s five-year free cash flow profile was compelling, but shareholders are surely hoping for its trend to reverse. Continued declines could signal that the business is becoming more capital-intensive. Its free cash flow margin for the trailing 12 months was 8.5%.
Final Judgment
Tri Pointe Homes isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 8.8x forward price-to-earnings (or $44.23 per share). While this valuation is optically cheap, the potential downside is still big given its shaky fundamentals. We're fairly confident there are better investments elsewhere. We’d recommend looking at Microsoft, the most dominant software business in the world.
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