Sun Belt Trends And Demographic Tailwinds Will Shape Housing Demand

Key Takeaways

• Expansion into high-growth regions and accelerated lot absorption position Forestar for sustained revenue outperformance and operational efficiency improvements.
  
• Strong partnership with D.R. Horton, favorable demographics, and digital adoption enhance market share, demand, and long-term earnings visibility.
  
• Forestar's revenue growth and margins are challenged by customer concentration, market headwinds, region-specific risks, rising costs, and shifting demand preferences in the housing sector.

Catalysts

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

• Analyst consensus sees expansion into new markets and a larger community count as key growth drivers, but this likely underestimates the compounding effect of Forestar's entry into high-growth regions like the Pacific Northwest, Northern California, and the Mountain West, which are set to attract outsized migration and homebuilding activity; this should drive sustained above-peer revenue expansion as lot absorption accelerates well beyond current sales trajectories.
  
• Analysts broadly agree that alignment with D.R. Horton could meaningfully lift Forestar's market share, but underestimate how quickly Forestar can move from 15% of D.R. Horton's lots to one-third, especially as D.R. Horton's own focus on affordable homes intensifies; this could double Forestar's revenues from its largest customer and sharply enhance earnings visibility and operating leverage.
  
• Massive demographic tailwinds as Millennials and Gen Z reach prime home-buying age-coupled with ongoing underbuilding-point to a structural, multi-year surge in demand for affordable, move-up, and entry-level housing, driving consistently higher lot pricing and gross margins as finished lot shortages persist.
  
• Rapid adoption of advanced digital tools and data-driven processes in land development will allow Forestar to materially compress project cycle times and reduce costs, supporting sustained improvement in net margins as scale increases and operational efficiency compounds.
  
• Forestar's large national footprint and disciplined market selection position it to be a consolidator of choice as institutional capital increasingly targets residential land, opening up strategic partnerships, premium exits, and new revenue streams that could materially boost long-term book value and EPS growth.

Forestar Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Forestar Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Forestar Group's revenue will grow by 8.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 10.5% today to 9.1% in 3 years time.
• The bullish analysts expect earnings to reach $176.3 million (and earnings per share of $3.43) by about July 2028, up from $162.6 million 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 12.5x on those 2028 earnings, up from 7.9x today. This future PE is lower than the current PE for the US Real Estate industry at 32.5x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.51%, as per the Simply Wall St company report.

Forestar Group Future Earnings Per Share Growth

Risks

• The company's heavy reliance on D.R. Horton as its primary customer increases concentration risk, making revenue and earnings vulnerable if D.R. Horton reduces its purchasing volume or slows its own community growth, as was referenced in the call.
  
• Persistent affordability constraints and weaker consumer confidence, combined with long-term demographic headwinds such as declining U.S. household formation, could limit demand for new homes and finished lots, putting downward pressure on Forestar's revenue and future growth.
  
• Geographic expansion remains concentrated in high-growth Sun Belt regions and a few newly-entered markets, exposing Forestar to region-specific regulatory risk, potential natural disasters, and localized economic downturns, all of which may create volatility in revenue and compress net margins.
  
• Industry-wide escalation in land and development costs, labor shortages, and the potential for stricter environmental or zoning regulations present sustained upward pressure on expenses and the risk of project delays, which could erode profitability and reduce operating margins over time.
  
• The development and lot sale market is facing increased competition from alternative housing models and institutional investors, which, combined with the risk that emerging preferences (like remote work or build-to-rent communities) may reduce demand for traditional single-family lots, threatens Forestar's ability to sustain market share, revenue growth, and consistent earnings.

Valuation

• The assumed bullish price target for Forestar Group is $33.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Forestar Group'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 $33.0, and the most bearish reporting a price target of just $22.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $176.3 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $25.12, the bullish analyst price target of $33.0 is 23.9% 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.