Spotlight: Buffett Buys Real Estate Colossus

Few names are as prominent in real estate as D.R. Horton (NYSE:DHI) but when you couple a top homebuilder with the investing legend Warren Buffett taking a position in it, you’ve got an investment opportunity that demands further scrutiny.

With rising mortgage rates and waning home sales, buying a homebuilder seems an unusual play, so what makes D.R. Horton an attractive pick for both Berkshire Hathaway?

One little-known reason may be an edge the homebuilder has when it comes to risk management; it has optioned three quarters of its lots, the highest in the industry. But what else has compelled Buffett to snap up shares?

Key Points

• Warren Buffett’s Berkshire Hathaway has acquired nearly 6 million shares of D.R. Horton, making it a noteworthy addition to its portfolio. 
• D.R. Horton employs a unique risk management strategy where it has optioned three quarters of its lots, the highest in the industry. This acts as a protective hedge against economic uncertainties, adding a layer of safety that most of its competitors lack.
• The U.S. housing market has a deficit of about 5.5 million homes, offering a large-scale opportunity for homebuilders like D.R. Horton.

Buffett’s Homebuilding Foray

Buffett’s Berkshire Hathaway recently acquired nearly 6 million shares of D.R. Horton, a position worth over $600 million at last count.

What does Buffett see that’s special about D.R. Horton in a climate of rising economic uncertainty and seasonal headwinds?

On close examination, D.R. Horton has a competitive advantage that has likely attracted Buffett. Its moat lies in its scale and unique approach to optioning lots. While many other companies in the sector bear the brunt of economic uncertainties, D.R. Horton’s strategy to option the vast majority of its lots acts as a protective hedge. In fact, it ranks among the highest companies in the sector to employ the strategy, providing it with a significant risk-mitigation advantage.

Another factor in DHI’s favor is the US Housing market deficit, which sits at about 5.5 million homes according to the National Association of Realtors. DR Horton can capitalize on this supply constraint, positioning it favorably for future growth. With housing starts coming in well below recent estimates, demand is high for large-scale homebuilders like D.R. Horton.

Goldman Sees Upside In DHI

Adding another feather to its cap, D.R. Horton recently received an upgrade from Goldman Sachs, lifting its rating from Neutral to Buy.

Susan Maklari, a firm analyst, set a new price target of $131, indicating a potential upside of around 24%. Goldman Sachs believes that D.R. Horton is exceptionally poised to leverage its operational acumen amid market challenges to navigate the choppy economic environment.

In Goldman’s view, D.R. Horton is well-positioned to cater to consumers preference for quick move-in homes.

How Do Analysts Rate D R Horton?

Analysts generally are very bullish on the homebuilder with the average price target coming in at $140 per share. That’s right in line with a discounted cash flow forecast, which would suggest the company has as much as 37% upside.

Another reason Buffett may see value is the P/E ratio of the firm sits at just 7.1x versus a sector average of 9.0x. In addition, the company pays a 1.0% dividend, a characteristic Buffett has historically favored.

In the world of homebuilders, D.R. Horton makes for a compelling choice. Its unique approach to lot options, a seal of approval from Buffett and Goldman, and a very attractive PE ratio all combine to make this a stock worth watching.