Improved Capital Efficiency And Cycle Times Will Support Homebuilding Synergies

Key Takeaways

• Strategic land use and improved cycle times could enhance operating cash flow, margins, and returns on assets.
  
• Expanding market presence and share repurchases aim to boost revenue and EPS through cost efficiencies and reduced share count.
  
• Challenging market conditions and rising costs are compressing margins and pressuring D.R. Horton's profitability despite efforts to boost sales through incentives.

Catalysts

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

• D.R. Horton is focusing on improving capital efficiency and cycle times, which will allow for faster inventory turnover and could positively impact operating cash flow and returns.
  
• The company's strategic use of land controlled through purchase contracts (75% of their lot position) provides flexibility and capital efficiency, potentially leading to improved net margins and returns on assets.
  
• D.R. Horton is leveraging its large geographic footprint and increased community and market count, aiming to aggregate market share, thereby increasing revenue opportunities.
  
• Their rental operations generate synergies with homebuilding by enhancing purchasing power and spreading fixed costs, potentially improving net margins and cash flow.
  
• An aggressive share repurchase strategy, with plans to repurchase about $4 billion of common stock in fiscal 2025, is expected to enhance earnings per share (EPS) by reducing the outstanding share count.

D.R. Horton Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming D.R. Horton's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.2% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $4.6 billion (and earnings per share of $17.53) by about April 2028, up from $4.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the US Consumer Durables industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 6.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

D.R. Horton Future Earnings Per Share Growth

Risks

• The spring selling season started slower than expected, with potential homebuyers exercising more caution due to continued affordability constraints and declining consumer confidence, which could impact net sales orders and homebuilding revenues.
  
• There is an expectation for increased sales incentives to drive traffic and sales, which could lead to lower home sales gross margins and ultimately affect net margins.
  
• The average closing price for homes decreased 1% both sequentially and year-over-year, while net sales orders and order value also fell, indicating potential pressure on revenue and profitability.
  
• Homebuilding SG&A expenses increased by 4% from last year, and as a percentage of revenues, SG&A expenses rose, which could negatively impact net margins if this trend continues without a counterbalancing increase in sales.
  
• The company anticipates higher land costs in upcoming quarters, with sequential increases already observed, which could further compress gross margins and affect earnings.

Valuation

• The analysts have a consensus price target of $144.64 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 $180.0, and the most bearish reporting a price target of just $105.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $40.8 billion, earnings will come to $4.6 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $124.96, the analyst price target of $144.64 is 13.6% 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.