Company Overview: D.R. Horton, Inc. (NYSE: DHI) is involved in the building and sale of single-family houses in the entry-level as well as move-up markets. The business operations are spread in more than 91 markets across 29 states in the Southeast, East, Midwest, South Central, Southwest, and West regions of the US. The company has three reportable segments, namely (1) Homebuilding, (2) Forestar, and (3) Financial Services.

DHI Details

Expanding Geographical Reach & Inorganic Moves Aid DHI: D.R. Horton, Inc. (NYSE: DHI) has been one of the largest homebuilders by volume since 2002 in the United States. The company was incorporated in Fort Worth, Texas and was established in 1978. The company largely depends on land acquisition for expansion and thus, rapidly buys homebuilding companies in ideal markets along with making higher investments in lots and land.

The company has recorded a remarkable growth in 2QFY21, thanks to the improving housing market conditions in the United States. DHI’s 2QFY21 Homebuilding revenues, which accounted for ~96.7% of total revenues increased year over year, sustained by strong demand in U.S. housing market. Homebuilding revenues went up 41.3% year over year and came in at ~$6.19 billion in 2QFY21. Higher home deliveries aided the sales from Home, which rose a whopping 41.4% on pcp. Land/lot sales and other revenues increased from $15.5 million reported in 2QFY20 to $17.3 million in 2QFY21.

Notably, the company witnessed growth across all regions, namely East, Midwest, Southeast, South Central, Southwest and West. Apart from strong industry fundamentals, DHI’s industry-leading market share, reasonably priced product offerings through various brands and wide geographic footprint are likely to aid the company’s financials, going forward. The company remains on track to invest higher in well-priced lands and lots to bolster its revenues and strengthen its position in the new markets.

Geographical Diversification of Homebuilding Revenues; Analysis by Kalkine Group 

2QFY21 Key Results: During the quarter, the company reported adjusted earnings of $2.53 per share, which skyrocketed 95% on a year over year basis. Total revenues for the quarter increased 43% on pcp and came in at $6.4 billion. Revenues from the Financial Services segment, Forestar segment and homebuilding segment increased 115%, 80.45% and 41.3%, respectively, year over year, in 2QFY21. During the quarter, sales orders stood at 27,059 homes, depicting a rise of 35% on pcp, owing to growth in all geographic regions. The company’s consolidated pre-tax margin stood at 18.3% and went up 450 basis points year over year.

It is worth mentioning that the company is in a continuous process to bring down the construction and selling, general and administrative expenses. The company also remains on track to implement cost-cutting initiatives in its construction process and procure materials and labor at a lesser price. Further, DHI expects to improve the fixed cost leverage for FY21. The company remains on track to deliver on its growth strategies through a diversified product portfolio and expanding geographic reach.

Key Trends; Analysis by Kalkine Group

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter with a cash balance of $2.23 billion. As at 31 March 2021, DHI had unrestricted homebuilding cash of $1.9 billion and $1.8 billion of available capacity. At the end of the period, total homebuilding liquidity stood at $3.7 billion. At the end of the quarter, homebuilding debt came in at $2.6 billion. During the quarter, the company repurchased 4.5 million shares worth $350.4 million. As of March 31, 2021, remaining stock repurchase authorization stood at $115.1 million.

In 2QFY21, gross, operating, EBITDA and net margins stood at 27.9%, 18.3%, 18.7% and 14.5%, higher than the industry median figures of 27.7%, 11.5%, 13.6% and 8.7%, respectively. In 2QFY21, ROE stood at 7.3%, higher than the industry median of 4.2%.

Profitability and Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 45.26% of the total shareholdings, while the top 4 constitutes the maximum holding. The Vanguard Group, Inc., and Horton Family Limited Partnership are holding a maximum stake in the company at 10.01% and 6.57%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: On the flip side, pricing pressure continues to remain a major headwind for DHI. Further, stiff competition from peers adds to the woes. The homebuilding and lot development industries are cyclical in nature and are dependent on changing economic condition. Unfavorable real estate market or other conditions may adversely affect the company’s financial performance, going forward. Also, rising expenses, changes in government financing program, stringent regulatory measures and COVID-19 led uncertainties remain major headwinds.

Outlook: The company’s cost-cutting implementations are anticipated to partially offset the impact of COVID-19 led uncertainties. Owing to robust housing market conditions, the company remains focused to boost returns and augment capital efficacy in each of its communities and expand its market share. The company’s robust balance sheet and liquidity position strengthen its financial flexibility and aids it to pursue further acquisitions. The company aims to enhance its shareholders’ long-term value via both dividends and share repurchase programs. For FY21, the company now expects total revenues to be in the ambit of $26.8-$27.5 billion, as compared to the prior outlook of $25.2-25.8 billion. Homes closed are anticipated between 82,500-84,500 units in FY21, as compared to the prior view of 80,000-82,000 units.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~7.8%. The stock made a 52-week low and high of $50.93 and $106.89, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight premium as compared to its peer’s average considering the cost-cutting implementations, DHI’s industry-leading market share, broad geographic footprint, and robust product offerings. We have taken peers like Lennar Corp (NYSE: LEN), Toll Brothers Inc (NYSE: TOL), to name a few.  Considering the company’s decent 2QFY21 performance, geographical expansion, encouraging outlook, higher investments, cost-cutting initiatives, and valuation, we give a “Buy” recommendation on the stock at the closing price of $92.96, down by ~2.2% on 2 June 2021.  

DHI Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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