Expansion Into 10 Markets Will Build Future Pipeline

Key Takeaways

• Expansion into new markets and backlog of lots ensures strong future revenue and market consolidation.
  
• Alignment with D.R. Horton and strategic investments support market penetration and earnings growth.
  
• Dependence on D.R. Horton, rising costs, and market challenges could pressure margins and hinder revenue growth amidst slow sales and cautious consumer behavior.

Catalysts

Operates as a residential lot development company in the United States.

• Expansion into 10 new markets and a 21% increase in community count should support future revenue growth and market share consolidation.
  
• High contracted backlog of 25,400 lots ensures a strong pipeline of future revenue, representing $2.3 billion, which indicates robust future revenue streams.
  
• Alignment with D.R. Horton’s growth targets, aiming for 1 out of every 3 homes sold on a Forestar lot, can significantly increase revenue share and market penetration.
  
• Consolidation opportunities in the fragmented lot development industry, coupled with a stable land cost environment, may help maintain stable margins and competitive advantage.
  
• Robust capital structure and enhanced liquidity position enable strategic investments and flexibility to capitalize on market opportunities, supporting earnings growth and financial stability.

Forestar Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Forestar Group's revenue will grow by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.4% today to 8.5% in 3 years time.
• Analysts expect earnings to reach $171.9 million (and earnings per share of $3.33) by about May 2028, up from $168.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 5.9x today. This future PE is lower than the current PE for the US Real Estate industry at 21.0x.
• Analysts expect the number of shares outstanding to grow by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.54%, as per the Simply Wall St company report.

Forestar Group Future Earnings Per Share Growth

Risks

• The decrease in net income and pretax profit margin from the previous year, primarily due to the absence of nonrecurring high-margin items, indicates potential challenges in maintaining high profitability levels, which could impact earnings.
  
• The slow start to the spring selling season and cautious consumer behavior, influenced by affordability constraints and declining confidence, might result in slower lot sales and lower-than-expected revenue growth.
  
• Increasing SG&A expenses, driven by a significant rise in employee count, could lead to pressure on operating margins if revenue growth does not outpace the increase in operating costs.
  
• The heavy dependence on D.R. Horton as the largest customer, with Forestar aiming for 1 out of every 3 homes D.R. Horton sells to be on a Forestar lot, presents a risk of revenue concentration and exposure to D.R. Horton's market performance.
  
• Continued challenges in the homebuilding market, such as the cost of land development and regional demand fluctuations, particularly in key states like Texas and Florida, may hinder revenue and net margin expansion efforts.

Valuation

• The analysts have a consensus price target of $27.5 for Forestar Group 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 $32.0, and the most bearish reporting a price target of just $22.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $171.9 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 9.5%.
• Given the current share price of $19.45, the analyst price target of $27.5 is 29.3% 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.