D.R. Horton (DHI) is one of the largest homebuilders in the U.S. The company benefits from a broad geographic footprint, including 43 of the top 50 markets in the country, explains Doug Gerlach, editor of Investor Advisory Service — and a participating speaker at MoneyShow's Virtual Event on June 10-12.

In the past 12 months, Horton has closed nearly 60,000 homes at an average price of approximately $300,000. Though DHI also builds speculative homes, the company typically enters into sales contracts for homes yet to be built.

Generally, the time between the signing of a sales contract and closing/delivery of the home is two to six months. Geographic diversification benefits the company by helping to mitigate risks associated with regional economic cycles.

Though DHI is one of the largest builders nationally, home building is ultimately a local business. The company is well positioned, often serving as the top builder in its local markets. DHI’s position in both national and local markets offers certain scale advantages on critical inputs such as land, materials, and labor.

The housing market has continued to improve from the depths of 2009, though this improvement has come at a moderate pace. Housing is expected to continue to do well as inventory remains limited and millennials are starting families.

Since 2008, single-family housing starts have remained depressed relative to historical levels. This has created an environment where inventory is limited, especially within the entry-level market. Though the industry has increasingly focused on meeting the needs of the entry level buyer, demand relative to supply has remained robust.

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HI operates under a multi-brand strategy, offering homes across a variety of price points. The core D.R. Horton brand accounts for the bulk of revenue; however, its Express Homes brand targeting entry-level buyers has demonstrated the most impressive recent growth.

Horton started the Express Homes brand in 2014 and it has quickly grown to over one-third of total homes closed. With an average selling price of approximately $250,000, Express accounts for just under 30% of revenue.

New home prices are expected to be under modest pressure in the near term as builders raise incentives to maintain the pace of sales. However, as the impact of the virus subsides, favorable demographics and pent-up demand should provide a favorable backdrop for homebuilders.

Though DHI is likely to face near-term revenue pressure, we believe longer-term it should be able to grow its top line 8%. Given demonstrated cost control, we expect DHI will be able to generate expense leverage, which combined with share repurchases results in EPS growth of 12%.

Projecting 12% EPS growth over the next five years and applying a high P/E of 14.4, we get a potential high price of 129. Using the recent severe market low price results in a lower bound of 26. Therefore, we model an upside/downside ratio of 3.3 to 1 and a projected high return of 22% annually.

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