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At Home with D.R. Horton

06/14/2019 5:00 am EST

Focus: REAL ESTATE

Chris Graja

Senior Analyst: Retail, Argus Research Corporation

D.R. Horton Inc. (DHI) is one of the largest U.S. homebuilders based on homes delivered and revenue; we believe that annual economic growth of more than 2% in 2019 should continue to support the job market and give millennial-generation buyers the confidence to buy their first homes, notes Chris Graja, analyst with Argus Research.

We believe that DHI is well positioned to serve this market with its Express Homes brand, which offers homes at about $240,000, representing about 35% of closings and 29% of homebuilding revenue in 2Q19.

What has changed over the last year is that several years of rebounding home prices have outpaced income growth and higher interest rates have raised the cost of home ownership.

While we do not believe that these factors have ended the housing recovery, they have caused investors to reevaluate the multiple they are willing to pay for new homes and the companies that build them.

Interest rates have nonetheless declined from their November 2018 highs. Going forward, we expect mortgage rates to remain affordable. We also expect an acceleration in household formation in a strong job market.

At the same time, we expect builders to emphasize home designs that are smaller and more efficient to build in order to keep prices affordable.

This is an area where DHI appears to have an edge on many rivals. Two thirds of the homes DHI sold in calendar 2018 sold for under $300K, a sign that DHI is well positioned to serve value-conscious buyers.

We expect large builders to take market share from smaller builders. We look for DHI to benefit from its range of brands for high-end and especially entry-level homebuyers. D.R. Horton should also benefit from its broad geographic diversification and healthy balance sheet.

We are maintaining our FY20 estimate at $4.55. This still reflects about 7% sales growth. Our pretax margin estimate is still 12.45%. Our sales base is a little lower, but we also lowered our share count estimate based on the count at the end of 2Q.

We recently reduced our long-term earnings growth rate estimate to 9% from 12% because housing affordability is strained in a number of markets.

At this point, we don’t expect home prices to rise faster than income growth, but our expectation has been for unit growth rather than a higher selling price. We believe the low unemployment rate, which we expect to persist, will help more families to afford homes.

We think DHI’s national presence will allow it to move production to the most promising markets and its successful designs for value-conscious buyers should let them result in a gain in market share. We are maintaining our buy rating and are raising our target price to $50 from $47.

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