​D.R. Horton Builds a Lighter Asset Strategy

MoneyShow |

D.R. Horton (DHI) is the largest homebuilder in the U.S. by both number of homes sold and revenue. The company benefits from a broad geographic footprint, operating in 41 of the top 50 markets in the country—with Texas and Florida the two most meaningful states for the homebuilder, says Doug Gerlach, editor of Investor Advisory Service.

Over the past 12 months, the company has closed nearly 45,000 homes at an average price of approximately $295,000. Though DHI is the largest builder nationally, home building is ultimately a local business. The company is well positioned, often serving as the top builder in its local markets.

Its Express Homes brand targeting the entry-level buyer has demonstrated the most impressive recent growth. D.R. Horton started the Express Homes brand in 2014 and it has quickly grown to over 30% of total homes closed for the company.

With an average selling price of approximately $225,000, Express accounts for about 25% of total revenue. D.R. Horton also offers the Emerald Homes brand for the higher-end move up and luxury buyer and recently started the Freedom Homes brand, offering a low-maintenance lifestyle in communities designed for active adults.



During the financial crisis, DHI wrote off $4 billion of land.

To limit upfront capital investment, DHI has increased the option portion of its land and lot portfolio. Land option contracts give DHI the right, but not the obligation, to buy land or lots at predetermined prices.

This reduces the risk associated with land ownership and development. The move to an asset-lighter strategy should help boost returns on capital and result in improved free cash flow.

DHI is expected to grow revenue between 14%-16% for fiscal year 2017, which ends in September. Management expects revenue
growth between 10%-15% in fiscal 2018.

Given demonstrated cost control, we expect DHI will be able to generate some leverage with EPS growth exceeding revenue growth.

If we project 12% EPS growth over the next five years and apply a high P/E of 15.4, we get a potentially high price of $72.

Applying a low P/E of 11.0 to 2016 EPS of $2.36 yields a low price of $26. Therefore, we model an upside/downside ratio of 3.5 to 1 and a projected high return in excess of 15% annually.

Doug Gerlach is president of ICLUBcentral Inc., a wholly-owned subsidiary of BetterInvesting.

Subscribe to Investor Advisory Service here…

About MoneyShow.com: Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
DHI D.R. Horton Inc. 42.67 0.14 0.33 3,634,241 Trade

Comments

Emerging Growth

MGX Minerals Inc.

MGX Minerals is a diversified Canadian mining company listed on the Canadian Securities Exchange. MGX is engaged in the acquisition and development of industrial mineral deposits in western Canada that…

Private Markets

iPRO Network, LLC

We provide the platform, tools, and resources to empower individuals and professionals to market desirable goods and services to the public, taking the place of traditional methods of commerce.

Voleo

Voleo is a free download that allows you to form investment clubs with your friends, family, colleagues, classmates, teammates…basically anyone you know and trust. Invest and manage a stock portfolio…