D.R. Horton Is A Great Long-Term Play, But Be Aware Of Near-Term Headwinds

Jun. 15, 2022 11:11 PM ETD.R. Horton, Inc. (DHI)3 Comments
Bela Lakos profile picture
Bela Lakos
416 Followers

Summary

  • Strong first quarter financial and operational results, including increasing sales, expanding margins and gain of market share.
  • Safe, sustainable and growing dividend payments, combined with low price multiples and a newly announced share buyback program make the firm an attractive option.
  • On the other hand, declining consumer confidence, increasing interest rates, and the potential trend change in the number of building permits maybe signalling challenges ahead for DHI.
  • Also, during the 2007-2010 period, the S&P Homebuilders ETF has significantly underperformed the broader market by declining more than 75% from peak to trough, indicating further potential downside for D.R. Horton.
  • Despite the macroeconomic headwinds, due to the strong fundamentals we believe that DHI's stock at the current price level could be an attractive choice for investors with a longer investment horizon.

D.R. Horton New Home Construction During Coronavirus

mphillips007/iStock Unreleased via Getty Images

D.R. Horton (NYSE:DHI) is a homebuilding company operating in 31 states and in 98 markets of the United States. During 2022, the firm's shares have been hit hard, resulting in an almost 40% decline in price, compared to the roughly 20% decline of the broader market.

Chart
Data by YCharts

In our opinion, the fundamentals of the firm have not changed materially and they remain to be a solid choice for long-term investors. On the other hand, the current macroeconomic conditions, including higher commodity prices, increasing freight costs and a declining consumer confidence may lead to further downside.

In this article, we will take a look at what we like about the firm and what potential headwinds it may face in the near term.

What we like

Financials and operations

D.R. Horton has presented strong financial results for the quarter ending 31.03.2022.

The firm's net income attributable to D.R. Horton has grown as much as 55%, reaching $1.4 billion. Along with net income, consolidated revenues and consolidated pre-tax income have also increased by more than 50%.

Further, DHI has a strong track record of growth, as it has been steadily growing throughout the last 30 years, not only in absolute terms, but also in terms of market share. As of 2021, the firm has achieved a market share of 11% of all-new single-family home sales.

chart DHI growth

DHI growth (D.R. Horton)

When taking a deeper look at the market share, we can see that in 4 out of their 5 top markets, including DFW, Houston, Atlanta and Austin, they are the dominant player.

bar chart market share

Market share (D.R. Horton)

In the first quarter of 2022, the number of net homes sold have been 24,340, while homes closed reached 19,828.

chart sales and closings

Sales and closings (D.R. Horton)

Last, but not least, DHI has been also consistently improving its margins in the last five years, with an especially strong improvement starting in 2020.

line chart margins

Margins (Macrotrends.net)

We believe that these trends are likely to continue in the long term as a large number of millennials are reaching home-buying age in the next 5 years. Due to this reason, BofA has also picked DHI as one of the best stocks for 10 shifts in the face of the planet.

In our opinion, D.R. Horton's financial and operational performance in the last years have been outstanding, as they have exhibited growth, improving margins and a gain of market share. We believe that DHI is a quality homebuilder that could be a great potential addition for an investor looking for an exposure to the homebuilding market with a long investment horizon.

Dividends

D.R. Horton has a strong track record of paying dividends, with 24 years of consecutive payments (including the accelerated dividends of 2013 paid in 2012) and 8 years of consecutive dividend increase. These figures are both significantly above the consumer discretionary sector median of 10 years and 1 year, respectively.

bar chart dividend history

Dividend history (Seekingalpha.com)

As DHI has a Dividend Payout Ratio (TTM) (GAAP) of 6.3%, compared to the sector median of 26% and its earnings are not expected to significantly decrease in the near future, we believe that the firm is well-positioned to keep paying dividends to its shareholder, even if near-term macroeconomic headwinds materialise.

In our opinion, DHI could be also an attractive choice for dividend and dividend growth investors.

Valuation

According to the traditional price multiples, DHI's stock appears to be trading at a significant discount compared to the sector median of the consumer discretionary sector.

DHI's P/E Non-GAAP (FWD) is 3.8x, compared to the sector median of the consumer discretionary sector of 11.3x, and compared to its own 5-year historic average of 10.2x. According to both figures, the current P/E is indicating a 60% discount. Similar trends can be seen in terms of the EV/EBITDA multiple.

Comparison with the consumer discretionary sector might appear a bit misleading as it contains a lot of firms outside of the homebuilding industry. If we look at several of DHI's direct peers and competitors, we also find that the firm appears to be relatively undervalued (e.g.: Lennar corporation (LEN) P/E Non-GAAP (FWD) 4.1x, NVR (NVR) 7.8x, PulteGroup (PHM) 3.7x, TopBuild Corp (BLD) 11.9x).

Although we believe that the near-term headwinds are likely to negatively impact DHI's earnings, the current valuation could be an attractive entry point for investors with a longer-term time horizon.

Share Repurchases

Although DHI's number of shares outstanding has slightly increased over the last decade, we believe the trend is about to turn. DHI has announced that they are authorising a new repurchase program for $1 billion, with no expiration date. They are aiming to buy back as much as 3% of their outstanding shares.

In our view, share buyback programs are a great way to return value to shareholders, if the firm has the necessary resources to do so.

What we don't like

Declining consumer confidence and rising interest rates

U.S. consumer confidence has been steadily declining in the last months, reaching a 10-year low reading, approaching levels observed in 2008-2009.

line chart consumer confidence

U.S. Consumer confidence (Tradingeconomics.com)

The low consumer confidence is likely to lead to a change in the spending behaviour of the people. This change includes potentially lower spending on durable goods and on consumer discretionary items. This could also significantly impact the demand for housing.

Also important to mention that most of the real estate purchases are financed through mortgages. As the Fed is increasing the interest rates, mortgages are becoming more and more expensive, therefore potentially driving the demand lower for houses.

If we take a look back on the performance of the homebuilders from 2007-2010, a period described by relatively low consumer confidence, we can see that the SPDR Homebuilders ETF (XHB) has significantly underperformed the S&P 500 (SPY). Although we have seen the housing bubble burst in 2008, and consumer confidence was not the only factor in force, we believe that the above-mentioned time period could still serve as a basis for comparison.

Chart
Data by YCharts

Despite DHI's prices falling 40% year-to-date, by no means do we believe that we have reached the bottom, based on the historic trends.

Potential trend change in building permits

Although the number of new building permits remain high compared to pre-pandemic levels, the recent decline may be signalling a change in the trend.

line chart building permits

Building permits (Tradingeconomics.com)

The decline in building permits could serve as a leading indicator of the economic cycle and also of the demand for new housing units in the near future. A decline indicates that demand is falling, which could have a material impact on DHI's financial performance and eventually on its earnings.

Key Takeaways

DHI has presented strong financial and operational results in the first quarter of 2022. The firm has managed to keep expanding its margins and increasing its sales.

D.R. Horton is paying a sustainable dividend, while the firm also announced a new authorisation for share buybacks.

According to the traditional price multiples, the firm appears to be undervalued; however, according to historic trends, homebuilders tend to underperform the broader market during times of low consumer confidence.

The increasing interest rates, the declining consumer confidence and the recent decline in the number of building permits may signal headwinds for DHI in the near term.

This article was written by

Bela Lakos profile picture
416 Followers
Petroleum engineer with an enthusiasm for investing, accounting and personal finances.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Past performance is not an indicator of future performance. This post is illustrative and educational and is not a specific offer of products or services or financial advice. Information in this article is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. This article has been co-authored by Mark Lakos.

Recommended For You

Comments (3)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.