Focus On Affordable Homes And Faster Construction Will Drive Future Success

Key Takeaways

• D.R. Horton's affordable housing focus and faster cycle times enhance sales volumes, efficiency, and margins in a limited supply market.
  
• Strategic partnerships and financial services boost capital efficiency, bolstering margins, EPS, and stock valuation.
  
• Higher incentive costs, market conditions, and increased expenses are pressuring profitability, with potential revenue growth slowing and investor sentiment affected.

Catalysts

Operates as a homebuilding company in East, North, Southeast, South Central, Southwest, and Northwest regions in the United States.

• D.R. Horton's focus on affordable product offerings and smaller floor plans positions it to capture demand in a market where affordable housing supply is limited, potentially leading to increased sales volumes and higher revenue.
  
• The company's improvement in construction cycle times by about 3 weeks year-over-year could allow for faster inventory turnover and increased efficiency, positively impacting net margins and earnings.
  
• The strategic relationship with Forestar, D.R. Horton's lot development company, enhances capital efficiency and operational flexibility, potentially leading to better returns on investment and improved net margins.
  
• D.R. Horton’s plan to continue significant share repurchases and dividend payments demonstrates confidence in its cash flow generation, likely contributing to higher earnings per share (EPS) and supporting stock valuation.
  
• The company’s focus on leveraging its financial services, where 79% of homebuyers finance through DHI Mortgage, could bolster revenues and margins by capturing financing fees and ensuring steady demand for its homes.

D.R. Horton Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming D.R. Horton's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.7% today to 11.9% in 3 years time.
• Analysts expect earnings to reach $5.1 billion (and earnings per share of $18.22) by about January 2028, up from $4.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $4.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from 9.7x today. This future PE is greater than the current PE for the US Consumer Durables industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 3.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.07%, as per the Simply Wall St company report.

D.R. Horton Future Earnings Per Share Growth

Risks

• The gross profit margin on home sales is expected to decrease due to higher incentive costs and market conditions, potentially lowering overall net margins and profitability.
  
• A decrease in earnings per share from the prior year indicates challenges in sustaining prior earnings levels, which may affect investor sentiment and financial performance.
  
• Decreases in net sales orders and order value suggest potential slowing revenue growth, which may impact future revenue projections.
  
• An anticipated increase in SG&A expenses without a corresponding increase in revenue could pressure net margins and reduce overall earnings.
  
• Uncertainty in capital markets and higher interest rates are negatively impacting rental operations' pretax profit margins, which might affect overall earnings.

Valuation

• The analysts have a consensus price target of $167.26 for D.R. Horton based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $220.0, and the most bearish reporting a price target of just $125.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $42.9 billion, earnings will come to $5.1 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 8.1%.
• Given the current share price of $143.95, the analyst's price target of $167.26 is 13.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.