This Homebuilder Looks Like a Bargain

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2012 was an excellent year for homebuilders, with many companies tacking on large double-digit gains for the year. This has left some homebuilder stocks trading at fairly hefty valuations, but there are still a few bargains left in the industry. While housing may have cooled down somewhat in January of this year, 2013 is shaping up to be another good year in terms of recovery. One of the homebuilders that is trading at low multiples on the one hand, and delivering solid growth on the other hand, is D.R. Horton (NYSE: DHI).

Company Overview

D.R. Horton, “America’s Builder,” is the largest builder in the United States. As this nickname suggests, the company engages in the construction of homes, duplexes, condominiums and town houses, operating in 26 states and 77 markets. Additionally, the company acquires and develops land, and is also active in mortgages. Having had a spectacular rally of over 60% in the last year, the stock is now about a dollar off its 52-week high. The stock has a $7.6 billion market cap and yields 0.60%.

Valuations and Metrics

Looking at TTM P/E, D.R. Horton is currently the cheapest of the major American homebuilders with a ratio of only 8.47, compared to Lennar Corp’s (NYSE: LEN) 12.9 and PulteGroup’s (NYSE: PHM) rather high 37.6. While these competitors are more or less evenly matched in terms of market cap, D.R. Horton is the largest based on homes closed. The company’s year-over-year revenue growth of 41% is nearly equal to Lennar’s 42% and considerably higher than PulteGroup’s 24%. The stock, moreover, has an excellent return on equity of almost 32% and a price-to-book of only 2.12.

Earnings and Growth

D.R. Horton, on the back of the housing recovery, did a good job of growing earnings in 2012, but where the company really hit it out of the park and then some was the 2012 Q3 report. According to CNBC, whereas analysts expected EPS of 20 cents, the company in fact posted earnings of about $788 million, or $2.22 per share, beating by over 1000%. However, it is important to note that this figure includes a non-cash tax benefit of $716.7 million. For the quarter, the company posted its highest pretax income since 2007 and the highest in the industry, with net sales up 25% compared to the same period in 2011.

Putting the liquidity gained to work, the company is increasing its investments which should continue to fuel profitable growth, according to management. Encouragingly, the company also delivered strong beats for the two quarters since the Q3 2012 report. Management remains optimistic about the prospects for growth this year, despite a still challenging housing market, arguing that the company is better positioned than ever. Q1 2013 results moreover represented the best first quarter since 2007.

In any case, D.R. Horton seems to be doing better with earnings than the two previously mentioned competitors. After a few years of very slow growth, Lennar seems to be ramping things up a bit looking forward for the year, with analysts expecting an EPS of $1.63 for 2013. The 3-5 year expected EPS growth is around 16%, compared to D.R. Horton's 11%. PulteGroup, on the other hand, has been doing poorly. After delivering mostly negative earnings for the last few years, things seem to have turned around through 2012. However, the expected growth rate for the next 3-5 years is still negative at -16.5%.

Bottom Line

Despite slowing down a bit in January, the US housing recovery seems to be in full swing with fewer foreclosures and more people buying homes. While many stocks in the industry have had a great run in 2012, some still appear to be trading at very reasonable valuations. At the moment, it appears as if D.R. Horton is priced at a bargain compared to the industry and the broader market. Moreover, the company is delivering great earnings and expects continued strong growth.


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