What's Happening With D.R. Horton Stock?

D.R. Horton (NYSE: DHI), a U.S.-based home construction firm, has seen a 12% increase over the past month, outpacing the S&P 500’s 4% rise. Although the company has not provided any financial or operational updates recently, this surge is part of a larger sector-wide increase resulting from improved sentiment in the housing market. If you are looking for potential gains with less volatility than individual stocks, the Trefis High Quality portfolio offers an alternative, outperforming the S&P 500 and yielding returns of over 91% since its launch.

Confidence in the housing market is growing as mortgage rates decline from nearly 7% to approximately 6%, enhancing affordability and encouraging buyer activity. With an increase in listings and a decrease in investor demand, buyers are starting to regain power. The National Association of Realtors projects that if rates remain near 6%, 6.2 million households may afford a median-priced home, possibly stimulating sales. For homebuilders, this could result in a renewed demand, buoyed by a decade of underbuilding and consistent demographic growth.

Is DHI Stock a Buy?

DHI stock is trading significantly below its 52-week peak of $197, currently sitting around $140. At first glance, the valuation seems attractive, especially in relation to the broader market. D.R. Horton has a price-to-sales ratio of 1.2, which is considerably lower than the S&P 500’s 3.1. Its price-to-earnings ratio is merely 10.5 compared to the benchmark’s 26.9, and its price-to-free cash flow stands at 15.0, lower than 20.9 for the benchmark. These figures indicate that investors are spending much less for each dollar of the company’s revenue, profit, and cash flow. Nevertheless, a more detailed examination of the fundamentals presents a more complex scenario.

Although the U.S. housing sector exhibits long-term strength, D.R. Horton’s recent operational trends raise concerns. Revenue growth has averaged just 5.3% annually over the past three years, which is slightly less than the S&P 500’s 5.5%. In the last year, revenue fell by 4.7% to $35 billion, and in the most recent quarter, sales decreased by 15.1% year-over-year to $7.7 billion, while the broader market achieved modest gains. Profitability appears mixed. DHI retains an operating margin of 15.1% and a net income margin of 12.2%, which are solid figures, but its operating cash flow margin of 8.1% significantly trails the S&P 500’s average of 14.9%. Regarding financial stability, the company seems reasonably robust, with $6.6 billion in debt and a modest debt-to-equity ratio of 16.1%, slightly better than the S&P 19.4%. It also possesses $2.5 billion in cash—or about 6.9% of its total assets—which provides some financial maneuverability.

The Bottom Line

In conclusion, while D.R. Horton’s valuation might seem inexpensive, this discount is arguably warranted due to weak recent growth and average profitability. The stock has potential upside if housing indicators continue to improve, but the mixed fundamentals suggest it is a cautious purchase at the present prices.

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