Expansion Into New Markets And DR Horton Partnership Will Unlock Future Potential

Key Takeaways

• Strategic expansion into new markets and enhanced operational efficiency aim to boost growth and improve cash flow and margins.
  
• Strategic investment and alignment with D.R. Horton strengthen revenue potential through increased sales volume and geographical diversification.
  
• Dependence on D.R. Horton and operational inefficiencies could strain Forestar's profitability amid rising costs and governmental delays affecting revenue growth.

Catalysts

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

• Forestar is investing significantly in land acquisition and development, with plans to increase investment by approximately 25% to $2 billion in fiscal 2025. This strategic investment positions the company to capitalize on future revenues, aiming to deliver between 16,000 and 16,500 lots and potentially generating $1.6 billion to $1.65 billion in revenue for the year.
  
• The company has broadened its geographical footprint by entering new markets like Virginia and reentering Washington, Oregon, and Utah. This diversification is aimed at accelerating future growth, which could positively impact revenue and earnings.
  
• Forestar has a robust relationship with D.R. Horton and is strategically aligning to increase its market share of lots to D.R. Horton, intending to meet 30% of its lot needs over time. This partnership could lead to an increase in sales volume and revenue.
  
• Forestar is focusing on improving operational efficiency, such as reducing cycle times, despite governmental delays. Improving cycle times will enable faster lot delivery, which should positively affect revenue and potential net margins by accelerating cash flow and reducing holding costs.
  
• The company has a strong financial position with significant liquidity and low leverage, which provides flexibility to capitalize on attractive opportunities swiftly, potentially enhancing earnings through strategic investments and acquisitions.

Forestar Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Forestar Group's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.5% today to 11.4% in 3 years time.
• Analysts expect earnings to reach $228.4 million (and earnings per share of $4.43) by about December 2027, up from $203.4 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 11.3x on those 2027 earnings, up from 6.7x today. This future PE is lower than the current PE for the US Real Estate industry at 27.6x.
• Analysts expect the number of shares outstanding to grow by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.31%, as per the Simply Wall St company report.

Forestar Group Future Earnings Per Share Growth

Risks

• Extended cycle times due to governmental delays and entitlement processes could negatively impact Forestar's ability to deliver lots on time, affecting revenue growth and profitability.
  
• The increase in SG&A expenses and a growing team could strain net margins if operational efficiencies are not realized to offset these costs.
  
• Dependence on D.R. Horton for the majority of sales exposes Forestar to risks if this relationship weakens or if D.R. Horton's market position changes, potentially impacting Forestar's revenue and market share.
  
• Nonrecurring high-margin projects and asset sales positively impacted profit margins; without these in future periods, margins may fall, affecting overall earnings.
  
• Rising costs and limited availability in land and development could pressure Forestar's ability to maintain profitability and achieve its growth targets, impacting net margins.

Valuation

• The analysts have a consensus price target of $39.75 for Forestar Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.0 billion, earnings will come to $228.4 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 8.3%.
• Given the current share price of $26.99, the analyst's price target of $39.75 is 32.1% 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.