As a group, homebuilders enjoy encouraging industry fundamentals (strong new-home sales), solid fundamentals and share-price momentum, explains Richard Moroney, editor Dow Theory Forecasts.
Not surprisingly, one of the chief concerns about the group is valuation, as most homebuilders now trade at a premium to historical norms. D.R. Horton International (DHI) is no exception. Indeed, the company is big, strong and diverse.
The shares trade at 19 times trailing earnings, 21% above the five-year norm. But the stock’s trailing P/E is 8% below the average homebuilder in the S&P 1500 Index, while its PEG (price/earnings-to-expected growth) ratio of 0.7 is among the lowest in the industry.
In each of the last 16 years, D.R. Horton has built more homes than any U.S. rival, closing on more than 45,000 properties in the year ended September. The company operates in 40 of the 50 largest markets, ranking among the top five in 28 markets and No. 1 in 13.
Unlike many rivals, D.R. Horton aggressively targets homebuyers of all income levels, offering entry-level homes costing around $100,000 as well as properties selling for more than $1,000,000. In the year ended September, 47% of D.R. Horton’s homes sold for $250,000 or less, while just 7% cost more than $500,000.
That business diversity positions the company better than most for periods when more young people take the homeownership leap. According to Zillow, millennials have become the largest group of home buyers, accounting for 42% of all purchases.
The median U.S. price for new homes in November was $318,700, up 1.2% from a year earlier. Houses costing less than $300,000 accounted for 45% of total sales — up slightly from a year ago, though still well below levels before the recession.
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Younger buyers are entering the housing market at a slightly higher rate than in recent years. If that trend continues, lower-priced homes should continue to rise as a percentage of total sales, benefiting D.R. Horton more than its rivals.
The company’s focus on lower-cost homes hasn’t hurt margins. Homebuilding ROI (return on investment) rose to 16.6% in fiscal 2017, up from 15.4% in 2016 and 11.1% in 2014.
To increase its inventory of land, which can both boost profits and fatten margins, the company in October purchased 75% of land developer Forestar ($22; FOR) for $560 million.
The Blue Chip Economic Indicators consensus calls for U.S. housing starts to increase 5.8% in 2018, up from 2.6% growth in 2017. In November, new-home sales jumped more than 17% from October levels, as reported by the U.S. Census Bureau.
All regions of the U.S. managed at least 6% growth, with the West leading the way at 31%. At the end of November, about 4.6 months’ worth of supply was on the market, down from 5.4 months in October and 6.0 months in August.
