Analysts' Choice: Build Something Special With Horton

7/11/2016


  Recent Price
$33
  Dividend
$0.32
  Yield
1.0%
  P/E Ratio
15
  Shares (millions)
374
  Long-Term Debt As % Of Capital
34%
  52-Week Price Range
$33.10 - $22.97

D.R. Horton ($33; DHI) is a key player in the fast-growing — and highly volatile — home-construction market. Founded in 1978, D.R. Horton has become the largest homebuilder in the U.S., based on both revenue and the number of homes closed.

Single-family housing starts rose 14.5% in the first five months of 2016. D.R. Horton says its backlog reached $4.1 billion at the end of March, up 14% from a year earlier and equating to about 36% of 12-month sales. In May, management gave upbeat comments about its spring selling season.

The stock earns above-average scores in Quadrix for all six categories, contributing to an Overall rank of 97. D.R. Horton also stacks up well against other consumer-discretionary stocks, as evidenced by both sector-specific scores exceeding 95. D.R. Horton, initiated as a Buy and a Long-Term Buy in the June 27 issue, is being added to the Focus List.

Business breakdown

Operating in 27 states, D.R. Horton has a presence in most major U.S. geographic regions outside of New England, with its greatest exposure to southern states. About 90% of revenue comes from the construction and sale of single-family detached homes. The remainder of D.R. Horton's business focuses on building multi-unit homes and offering mortgage financing and insurance products.

Home construction is a fragmented industry with few barriers to entry. D.R Horton's scale offers some advantages on cost and access to labor. It has also differentiated itself by targeting first-time homebuyers, a market segment ignored by many homebuilders because of its lower profit margins. The company's entry-level unit, Express Homes, builds houses priced below $200,000. Express generated about 16% of D.R. Horton's revenue in the first six months of fiscal 2016 ending September, up from about 7% in the year-earlier period. Despite its increasing focus on lower-priced homes, D.R. Horton said its average closing price for all homes rose 3% to $290,200 in the six months ended March.

Although operating cash flow turned negative from fiscal 2012 to fiscal 2014, recent trends are encouraging. Both cash from operations and free cash flow rose in five consecutive quarters. David Auld, who took the helm as CEO of D.R. Horton in October 2014, has pledged to pursue a steadier, if restrained, growth strategy in order to consistently generate positive free cash flow.

Conclusion

At 15 times trailing earnings, D.R. Horton shares trade in line with the median for S&P 1500 homebuilders but 32% below its own five-year median. The stock also looks cheap versus historical norms for its price/sales, price/operating-cash-flow, and enterprise ratios.

D.R. Horton expects to report June-quarter results on July 21. Analysts project earnings-per-share growth of 8% to $0.65 on sales of $3.25 billion, up 14%. Over the past 90 days, the profit consensus has slipped for the June quarter, but risen for the September quarter and fiscal 2017.

An annual report for D.R. Horton Inc. can be obtained at 301 Commerce St., Suite 500, Fort Worth, TX 76102; (817) 390-8200; www.drhorton.com.

D.R. HORTON
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '16
0.52
vs.
0.40
15%
32.51
-
22.97
16 - 11
Dec '15
0.42
vs.
0.39
5%
33.10
-
25.41
16 - 13
Sep '15
0.64
vs.
0.45
28%
33.06
-
27.65
18 - 15
Jun '15
0.60
vs.
0.32
37%
29.80
-
24.92
19 - 16
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
10.84
2.03
0.25
33.06
-
19.29
16 - 10
2014
8.04
1.50
0.14
25.23
-
17.59
17 - 12
2013
6.27
1.33
0.23
27.75
-
17.52
21 - 13
2012
4.36
0.73
0.15
22.79
-
8.03
31 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
90
79
94
54
74
54

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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