D.R. Horton, Inc.'s (NYSE:DHI) Low P/E No Reason For Excitement

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 20x, you may consider D.R. Horton, Inc. (NYSE:DHI) as an attractive investment with its 11.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's superior to most other companies of late, D.R. Horton has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for D.R. Horton

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like D.R. Horton's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 3.6%. EPS has also lifted 28% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 8.6% per year as estimated by the analysts watching the company. With the market predicted to deliver 11% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why D.R. Horton is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that D.R. Horton maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for D.R. Horton with six simple checks.

If these risks are making you reconsider your opinion on D.R. Horton, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.