D.R. Horton Builds an "Asset-Lighter Strategy"
10/02/2017 5:00 am EST
Focus: REAL ESTATE
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 potential 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.