Is D.R. Horton A Buy After Profit Jumps 84%?
Back in November I answered Is D.R. Horton A Buy After It Reaches An All Time High?
Today, I give an update after it released updated quarterly earnings and answer – Is D.R. Horton A Buy After Profit Jumps 84%?
You can read the past article in full by using the link above…
But if you don’t want to; here’s a quick recap of what I said back then about buying it before we get to today’s update.
D.R. Horton’s 1.1% Dividend
Over the last decade D.R. Horton paid out a total of $2.70 per share in dividends.
At today’s share count of 372 million shares that’s equal to $1.004 billion paid out to shareholders in the last decade.
Plus, in the last decade it grew its dividend 353% from $0.15 per share in 2010 to $0.68 per share now. This is an annual dividend growth rate on average of 35.3% per year.
These dividend payments will help you in normal times earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
These regular payments will help you earn more money for your retirement. And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.
It can do this because it earns solid profits. Which is reason #2 to buy D.R. Horton to Depression Proof Your Portfolio.
D.R. Horton Earns Solid Profits
Over the last decade it earned an average operating income margin of 8.8% per year.
I look for anything above 10% on a consistent basis so DHI falls just below this number.
But at the beginning of this decade it was still recovering from the largest housing crash in United States history. And its operating margins were only 3.7% per year on average from 2010 to 2012.
In the seven years from 2013 to 2019 its average operating profit margin was 10.9%. And this surpasses my 10% threshold.
This makes D.R. Horton a great operating business.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its -0.2% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.
If companies are consistently above 5% on this number, it makes the company a cash machine that spits out more and more cash from its operations.
D.R. Horton surpasses my threshold on an operating profit margin basis but not on an FCF/Sales basis… What does this mean?
That we need to keep looking at its stock to figure out whether we should buy it or not…
D.R. Horton Also Has Low Debt
As of this writing its debt-to-equity ratio is 0.39.
I look to buy companies that have a debt to equity below 1.
Because the lower debt levels the company has, the lower chance it has of going bankrupt. And this makes it a safer investment.
And its total liabilities as a percentage of its balance sheet is only 37.6%. One of the lowest I’ve shown you in these articles from recent months.
Because of D.R. Horton’s continued operating profits and the recovery in the housing market since 2012, it has ultra-low debt levels. And this makes investing in its stock safer.
But what about its valuation? Is it cheap?
D.R. Horton IS Cheap
With the markets at or near all-time highs you’d expect a fantastic stock like DHI to be selling at an enormous valuation.
But it’s not.
As of this writing its P/E is 11.4.
Its P/CF is 19.
Its forward P/E is 11.2.
And its enterprise value to operating income – EV/EBIT is 9.6.
On all three metrics at the top I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These show that D.R. Horton is undervalued when considered together right now.
And this means buying its stock gives you a margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning it going forward.
Usually, great stocks like D.R. Horton rarely sell at cheap prices… But there’s one more thing to consider before buying its stock.
The Coronavirus Isn’t Harming D.R. Horton – Yet…
Earlier in this pandemic people began stopping their mortgage payments. And an estimated 3.5 million homes are still in forbearance as of September 23rd, 2020.
Because of this, lenders began tightening their lending standards which led to a short-term crunch in the housing market when the pandemic began.
But the market was unleashed when The United States Federal Reserve (Fed) lowered interest rates on short term treasury bonds to almost zero at the beginning of the pandemic.
This dropped interest rates on home mortgages from around 3.75% on average in October 2019. To an average of 2.9% right now.
These historically low interest rates have kept the housing market going. And made it one of the few bright spots of the entire economy over the last few months.
This also helped D.R. Horton reach its all-time high share price of on October 15th, 2020 of $78.82 per share.
But will this continue?
If it doesn’t, will the housing market crash?
If new cases of the coronavirus continue exploding in the US, will President Elect Joe Biden lock the country down when he takes office in January 2021?
If he does, this will lead to more job losses. Which would negatively affect people’s ability to pay mortgages and buy homes.
And this would hurt D.R. Horton stock badly.
These unknowns – plus the negative FCF/Sales margin – are the only things keeping me from fully recommending you buy D.R. Horton stock right now.
I’ll keep you updated on this as things progress… But for now, due to the uncertainty from the issues I raised above – avoid the otherwise great looking D.R. Horton stock.
If you’re looking for a solid, safe, stable, dividend paying, cheap, and profitable investment to Depression Proof Your Portfolio – consider investing in D.R. Horton. But only when there’s more certainty about the housing market.
This thesis to avoid D.R. Horton in the short term due to the massive uncertainty illustrated above continued to play out after it released its most up to date quarterly earnings on January 26th 2021. Sort of.
- Revenue grew 48% in the year-to-year quarterly period of $5.9 billion.
- Home sales closed rose 45% in the year-to-year quarterly period to 18,739 homes sold and closed in the quarter.
- Backlog of homes under contract rose 107% in the year-to-year quarterly period to 28,487.
- And net income jumped 84% in the year-to-year quarterly period to $791.8 million.
Weirdly, shares of D.R. Horton are down from November though from $78.82 per share to $74.66 per share as of this writing.
Frankly, I’m not 100% sure because these are spectacular quarterly results.
What I am sure about is this now makes D.R. Horton even cheaper to buy now… Because when profits go up while share prices go down, valuations come down as well.
Here are the updated numbers to prove this…
As of this writing its P/E is 10.1.
Its P/CF is 21.5.
Its forward P/E is 8.8.
And its enterprise value to operating income – EV/EBIT is 8.5.
The one thing these quarterly earnings didn’t fix is the house industry related uncertainty from the coronavirus.
As of this writing, new cases of Covid and deaths from the virus are still exploding.
Which is leading to even more lockdowns.
Which leads to more job losses, business closures, and bankruptcies…
Which leads to fewer people having the ability to buy new homes like the ones D.R. Horton sells.
Until this is solved – or at the minimum the direction of the economy and lockdowns and Covid is more certain – I can’t recommend you buy D.R. Horton.
There’s far too much uncertainty related to all the above. And all this is far outside the control of D.R. Horton.
For these reasons, I continue to recommend you wait to buy D.R. Horton until there’s more clarity.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.