DR Horton Offers Value, Momentum, And Growth

A) Introduction

DR Horton (NYSE:DHI) is the biggest builder of homes in the United States, servicing the entire spectrum of customers from affordable housing through their Express Homes segment to high-end homes through their Emerald homes segment. The company released earnings on Monday, and smashed analyst estimates on both the top-line ($2.253B vs. $2.111B estimate) and bottom-line ($0.39 EPS vs. $0.35 estimate). The company saw its stock price rise accordingly, gaining 5.5% on big volume. The stock gave up most of those gains on Tuesday, after Citi downgraded their stock from a Buy to Neutral, though the stock recovered to finish down less than a percent. In this article we'll outline why DHI offers good value as well as price momentum, EPS growth, and return on equity. These metrics are the ingredients to outperformance and DHI's statistical profile makes it prime candidate for outperformance in 2015.

The report will start with a breakdown of DHI's valuation profile, followed by an analysis of the price and profit growth, and concluding with some qualitative analysis and conclusions. We take a quantitative approach to investing, preferring to focus our analysis on metrics that have strong predictive ability. Thus, we tend to analyze academic papers and perform historical back tests on different metrics before including them in our analysis. We will provide links to the academic papers we draw inspiration from as we progress through our breakdown of the stock so investors can see for themselves what we base our conclusions on.

B) Valuation Breakdown

We'll start by analyzing DHI's value profile. This is important to look at as Nobel laureate Eugene Fame found that "Value stocks (with low ratios of price to book value) have higher average returns than growth stocks (high price-to-book ratios)". DHI's valuation profile is shown below:


As you can see in the table above, DHI has very favourable value metrics relative to its industry group, sector, and overall market. On a revenue basis, DHI's sales yield of 90% is higher than each of its industry group (84%), sector (58%), and overall market (4%) averages. It bears mentioning that both its industry group and sector look very attractive relative to the overall market. Consumer discretionary has been one of the weakest sectors in the current bull market, and may represent one of the last avenues of value left in the market. This observation holds on an earnings basis, with DHI's earnings yield of 6.2% being higher than it's industry group (4.4%) and sector (2.1%) averages. The stock looks relatively cheap with a price/book of 1.74 especially when the overall market is commanding a +5 price/book. Overall, we rate DR Horton as "Undervalued" and expect the stock to outperform the market by 3.74% because of this undervaluation.

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Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in DHI over the next 72 hours. The author wrote this article themselves, and it expresses their ...

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