US Housing Shortage And Sun Belt Migration Will Expand Homebuilding

Key Takeaways

• Industry-leading build cycle improvements and inventory efficiency could drive superior cash flow conversion and elevated returns, enabling sustained capital returns to shareholders.
  
• Strategic focus on optioned lots and affordable homes positions D.R. Horton to outperform peers in changing markets, securing higher margins and long-term market share growth.
  
• Sustained affordability challenges, rising costs, and land risks threaten D.R. Horton's margins, profitability, and long-term growth given its entry-level market focus.

Catalysts

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

• While analyst consensus views D.R. Horton's capital efficiency and improved cycle times as drivers for steady improvement, these metrics are likely being underestimated-the company's rapid two-week year-over-year reduction in build cycle and ongoing inventory efficiency efforts could lead to a step change in cash flow conversion and returns on assets, well above peer averages, accelerating both net income growth and the ability to aggressively return capital to shareholders.
  
• Analysts broadly agree that the company's heavy use of optioned lots increases flexibility and margins, but the market is discounting the long-term impact of D.R. Horton's scale in land contracting-by pushing 76% of lots under option, D.R. Horton is positioned to weather land cost inflation far better than competitors and capture outsize returns on invested capital, potentially resulting in structurally higher gross and net margins for years.
  
• D.R. Horton's expansion in affordable entry-level and smaller-format homes is not just defensive in a tough rate environment-this focus directly targets the enormous, secular surge of millennial and Gen Z buyers entering their prime home-buying years, with an expected acceleration in unit volume and revenue growth as these cohorts fuel above-trend demand.
  
• The company's unrivaled scale across growth regions, particularly in the Sun Belt, uniquely positions it to capture migration patterns and persistent undersupply, driving outsized long-term market share gains and making revenue expansion less sensitive to regional cyclicality than peers.
  
• Early investments in construction technology, digital mortgage origination, and supply chain integration will allow D.R. Horton to structurally compress SG&A and build costs over the next cycle, setting the stage for sustainable margin expansion and elevated earnings growth relative to industry norms.

D.R. Horton Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on D.R. Horton compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming D.R. Horton's revenue will grow by 6.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 11.5% today to 11.4% in 3 years time.
• The bullish analysts expect earnings to reach $4.8 billion (and earnings per share of $18.2) by about July 2028, up from $4.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 11.9x today. This future PE is greater than the current PE for the US Consumer Durables industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

D.R. Horton Future Earnings Per Share Growth

Risks

• Persistent affordability issues, reflected in flat net sales orders, declining average sales prices, and elevated buyer incentives, indicate sustained margin pressure and the risk that D.R. Horton's primary customer base of entry-level and first-time homebuyers will shrink, negatively impacting future revenue and gross margins.
  
• Ongoing increases in sales incentives to maintain sales pace and competitive positioning are expected to continue lowering gross margins into upcoming quarters, raising concerns about D.R. Horton's ability to sustain current levels of profitability.
  
• The company's heavy dependency on lot purchases and land development, with over $2.2 billion invested this quarter and reported land impairments, exposes D.R. Horton to significant write-down risks and balance sheet volatility if the housing market slows or land values decline, which could weigh on future earnings.
  
• Despite temporary declines in stick and brick costs, management acknowledges that upward pressure on labor and material expenses, along with ongoing lot cost inflation in the mid-single digits, could outpace home price appreciation over time, further compressing net margins for high-volume builders like D.R. Horton.
  
• The focus on smaller, more affordable homes and the entry-level segment, while well-intentioned, limits pricing power and makes D.R. Horton more vulnerable to demographic headwinds-including slowing household formation and an aging US population-which could constrain long-term revenue growth and erode profitability.

Valuation

• The assumed bullish price target for D.R. Horton is $180.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of D.R. Horton's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $41.7 billion, earnings will come to $4.8 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $153.5, the bullish analyst price target of $180.0 is 14.7% 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.