Housing starts recently came in at seasonally adjusted annual rate of 1.6 million, a 21% increase from a year ago. It appears that homebuilding is finally breaking out of its decade-long slumber and showing signs of life. A shortage of homes, rock-bottom interest rates, and a massive demographic boost have created the perfect environment for homebuilders. One such builder is TRI Pointe Group, Inc. (NYSE:TPH), which despite being one of the smaller and cheaper builders, is reporting strong order growth. 

The wooden frame of a house being built.

Image source: Getty Images.

A big jump in orders

In the fourth quarter, TRI Pointe reported earnings of $0.85 a share, handily beating Street expectations (and fourth-quarter 2019 earnings) of $0.70 a share. Revenue growth was flattish compared with a year ago. Management was happy with the fourth quarter and discussed the expected growth going forward. 

In the earnings release, CEO Doug Bauer highlighted TRI Pointe's 52% year-over-year growth in unit orders, 21.9% homebuilding gross margins, and 21% EPS growth. "Demand was consistent throughout the quarter and broad-based across the country, as each of our brands posted year-over-year order growth in excess of 25%," Bauer said. 

On the earnings call, TRI Pointe said January orders were up 71% compared to a year ago. While the big increase in interest rates in 2018 affected orders in 2019, those challenges are behind the company. Falling interest rates should make homes more affordable in the tight markets in California and Washington. Fiscal year 2018 was a fantastic year for the company, driven by high home price appreciation in TRI Pointe's West Coast markets, so 2019 was a bit of a letdown. The company expects to deliver 5,100 to 5,300 homes in 2020, compared to 4,921 in 2019. This year will be back-end loaded, as the company is in a transition phase between older communities selling out and new ones that are still have a lot of building left. Uncertainty about interest rates and the economy affected the forecast, which was seen as conservative on the conference call. 

Strategic moves to diversify exposure and target new segments

TRI Pointe has historically been a luxury/move-up builder concentrated in California. The company has been diversifying its exposure from the West Coast and Mountain States, which have experienced the fastest home price appreciation over the past several years. The West Coast is particularly vulnerable to the coronavirus issue, especially as foreign investors exit the market. The company is building its presence in the Mid-Atlantic region, particularly the Carolinas and Maryland. The company has also been lowering average selling prices by building denser communities as a way to entice the first-time buyer and the active adult demographic. The company expects first-time homebuyers to represent about 40% of sales in 2020, up from 30%, while active adult sales increase to 10% from 3%. TRI Pointe has very little luxury exposure left. 

The homebuilding sector has a long runway

Housing starts' recent 21% jump sounds impressive, until you realize we are just barely back at historic levels. But history doesn't tell the whole story. Take a look at the chart below, which shows housing starts (upper chart) and then housing starts divided by the U.S. population (lower chart). When the population was only 218 million in 1976, 1.6 million starts might have been fine. But today, the United States population is more than 50% larger. With the millennial generation hitting prime home-buying years, the homebuilding sector has its work cut out for it. 

US Housing Starts Chart

US Housing Starts data by YCharts

A cheap stock in a cheap sector

TRI Pointe is currently trading around 9.3 times expected 2020 earnings per share, which is one of the lowest multiples in the sector. The average for the top publicly traded homebuilders is about 10.4, a valuation typically associated with peak cycle earnings, not at the end of a bust. Based on the 2020 EPS estimate, the company could experience 11% earnings growth this year, which gives it a P/E-to-growth ratio (PEG) below 1 -- the classic Peter Lynch indicator of an undervalued stock. Based on Street estimates, 2020 sales growth should come in at nearly 8%, rebounding from last year's -5.6%. Overall, TRI Pointe is a value stock in a sector that is cheap overall. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.