DR Horton Inc. (DHI, Financial) is an $11.43 billion market cap company, which is the largest publicly traded U.S. homebuilder.
Strategic acquisitions
Horton started operations in 1978, and it went public 14 years after to gain access to capital markets. Nowadays, it operates in 27 states and 78 metropolitan markets, making it a geographically diversified firm.
One long-term catalyst was the acquisition program, with approximately 20 in its history. Although the focus was asset-based transactions some years ago, the Texas-based company bought Schuler Homes and had increased its revenue base 25%. Further, with the aim of having a greater presence in the U.S. Northwest, it agreed to buy the homebuilding operations of Pacific Ridge Homes.
Negative signs
The firm is facing some challenges such as high debt and less efficiency. Investors should be aware of some negative signs before investing. Thanks to GuruFocus we can find them easily, and they are:
- New debt: over the past three years, the company issued $2.1 billion of debt.
- Less efficiency: the company builds asset at 17.2% a year, faster than its revenue growth rate of 11.8% over the past five years.
Quarterly performance
Revenues have increased by 28% to $3.09 billion, and earnings per share of 64 cents beat the estimate by 2 ce. The company expects to generate fiscal year 2015 homebuilding revenues up to 30% and obtain a gross margin in the 20% range. These targets are not so easily achievable due to increases in materials and labor costs, or higher interest rates, which could affect the demand. We must mention that rent costs have increased, and we can think about a housing market recovery.
Price evolution
As we can appreciate in the next graph, powered by its strong growth, the stock has surged by 35% over the past 12 months. Further, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $25,788, which represents a 20.8% compound annual growth rate.
Relative valuation
Regarding valuation, the stock sells at a trailing P/E of 16.91x, trading at a premium compared to the median of 15.20x for the industry. To use another metric, its price-to-book ratio of 2.03x indicates a premium versus the industry median of 0.99x while the price-to-sales ratio of 1.14x is above the industry median of 0.62x. Although these ratios indicate that the stock is overvalued, it has a forward P/E of 12.53 that remains below its trailing P/E, which indicates better prospects for the future.
Final comment
The company operates in a market where margins are going to improve, but competition will become stronger. Horton is the top housing stock, with strong financials, such as revenue and EPS growth and strong cash flow from operations. When the housing market improves, the company will lead that move.
Ken Griffin is one of the major shareholders with 7.3 million shares valued at $199.9 million at the end of June but reduced his position by 17% in the second quarter. In the third quarter, RS Investment Management (Trades, Portfolio) sold out the stock while Manning & Napier Advisors, Inc has reduced the position by 44%. On the other hand, Ken Fisher (Trades, Portfolio) upped his stake by 4.84%.
Disclosure: Omar Venerio holds no position in any stocks mentioned
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