D.R. Horton: Positive On Business Demand, But Valuation Not Cheap

Investment Overview - D.R. Horton, Inc. (NYSE:DHI) is rated as a hold due to unattractive valuation despite positive business outlook driven by high mortgage rates limiting existing home inventory and increasing demand for new homes [1] Business Description - DHI focuses on constructing and selling single-family homes, targeting entry-level and move-up markets, with significant regional contributions from South Central (25%), Southeast (28%), and East (20%) as of 3Q24 [2] 3Q24 Earnings - DHI reported 3Q24 revenue of $9.96 billion, gross profit of$2.67 billion, adjusted EBITDA of $1.83 billion, and operating EPS of$4.10; orders grew by 1%, closings by 5%, and average delivery price by 1% [3] - The conversion ratio improved to 135% compared to 119% in 3Q23, and management repurchased 3 million shares for $441 million during the quarter [3] Growth Outlook - The company is expected to benefit from macro conditions where high interest rates reduce existing home inventories, driving demand towards home builders; management noted solid demand with improving traffic late in the quarter [4] - DHI's focus on lower price points positions it well in the current market where affordability is a concern [5] Margins Outlook - DHI's EBITDA margin is trending upwards to 18.4% in 1Q24, expected to sustain due to solid demand, improved supply chain, and easing raw material prices; lumber prices decreased by 1% sequentially [7] - However, product mix changes, including a 2% decline in home sizes, may negatively impact margins, balancing out the positives [8] Valuation - DHI's revenue is projected to grow in mid-single digits for FY24 and FY25, with EBITDA margin unlikely to see further upsides due to investments in incentives and negative product mix [10] - The stock currently trades at 9x forward EBITDA, at the upper end of its historical range, indicating limited upside potential [10] Conclusion - The hold rating reflects the unattractive valuation despite strong demand outlook and solid execution; the market has priced in near-term positives, and adjustments to the recommendation may occur if valuation becomes more favorable [12]