Land Investments And DR Horton Partnership Will Strengthen Future Market Position

Key Takeaways

• Forestar's expanded land investments and new market entry present growth opportunities, enhancing future revenue through increased lot deliveries.
  
• Partnership with D.R. Horton strengthens revenue potential, supported by significant liquidity and efficient operations for improved profitability.
  
• Decreased revenue and profit margins, increased expenses, reliance on a major customer, and regulatory delays pose risks to Forestar Group's financial stability.

Catalysts

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

• Forestar is significantly increasing its land development investments, with a 50% increase in land acquisition and development spending from the prior year. This positions the company for future revenue growth as these investments are expected to drive higher lot deliveries and revenues in future periods.
  
• The company is expanding its market presence by entering new markets and increasing its community count by 25%, which could lead to increased revenue opportunities and market share expansion.
  
• Forestar's strategic partnership with D.R. Horton, targeting one-third of D.R. Horton's homes to be built on Forestar lots, provides a strong revenue pipeline and potential for increased earnings through increased lot sales.
  
• Forestar's strong financial position with significant liquidity and operational flexibility provides a competitive advantage, allowing it to take advantage of market opportunities and potentially improve earnings and net margins.
  
• The improvement in cycle times and stabilization of development costs could lead to more efficient operations, supporting better net margins and profitability in the future.

Forestar Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Forestar Group's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.5% today to 10.6% in 3 years time.
• Analysts expect earnings to reach $219.5 million (and earnings per share of $4.22) by about January 2028, up from $181.7 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 10.1x on those 2028 earnings, up from 6.7x today. This future PE is lower than the current PE for the US Real Estate industry at 27.9x.
• Analysts expect the number of shares outstanding to grow by 0.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.73%, as per the Simply Wall St company report.

Forestar Group Future Earnings Per Share Growth

Risks

• The company's net income and pretax profit margin have significantly decreased compared to the prior year, indicating reduced profitability and efficiency, which could affect overall earnings.
  
• Revenue decreased from the prior year, and although there are fluctuations expected, this decline could continue to impact future financial performance and revenues.
  
• SG&A expenses increased considerably due to higher employee counts to support expansion, leading to a negative impact on operating leverage and potentially compressing net margins.
  
• The company's reliance on D.R. Horton, its largest customer, for a significant portion of its lot sales presents a risk. Changes in D.R. Horton’s demand or business strategy could negatively impact Forestar’s revenue.
  
• Delays in government approval processes continue to extend cycle times, which can affect project timelines, costs, and ultimately impact revenue recognition and cash flow stability.

Valuation

• The analysts have a consensus price target of $33.25 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 $40.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $219.5 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 8.7%.
• Given the current share price of $24.0, the analyst's price target of $33.25 is 27.8% 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.