Construction Stocks

D.R. Horton Inc. Analysis – October 2015 Update $DHI

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – September 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how D.R. Horton Inc. (DHI) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): D.R. Horton, Inc. is the homebuilding company in the United States. The Company constructs and sells homes through its operating divisions in approximately 27 states and 79 metropolitan markets of the United States, under the names of D.R. Horton, America’s Builder, Express Homes, Emerald Homes, Breland Homes, Regent Homes and Crown Communities. The Company operates in two segments: Homebuilding and Financial Services. The Company’s homebuilding segment is engaged in the acquisition and development of land and the construction and sale of residential homes. The Company’s homebuilding operations are located in East, Midwest, Southeast, South Central, Southwest and West. The Company’s financial services segment provides mortgage financing and title agency services to the Company’s homebuilding customers. The Company’s homebuilding assets include approximately 350 lots, 90 homes in inventory and 40 homes.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of DHI

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $11,124,386,812 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 6.33 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -171.68% Fail
6. Moderate PEmg Ratio PEmg < 20 17.73 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.00 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 6.33 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.51 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

DHI value chart October 2015

EPSmg $1.71
MG Growth Estimate 15.00%
MG Value $65.86
Opinion Undervalued
MG Value based on 3% Growth $24.80
MG Value based on 0% Growth $14.54
Market Implied Growth Rate 4.61%
Current Price $30.33
% of Intrinsic Value 46.05%

D.R. Horton Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $1.33 in 2011 to an estimated gain of $1.71 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.61% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on D.R. Horton Inc. (DHI)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

DHI charts October 2015

Net Current Asset Value (NCAV) $9.98
Graham Number $26.15
PEmg 17.76
Current Ratio 6.33
PB Ratio 2.00
Dividend Yield 0.83%
Number of Consecutive Years of Dividend Growth 2

 

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Most Recent Balance Sheet Figures

Total Current Assets $8,928,500,000
Total Current Liabilities $1,411,400,000
Long-Term Debt $3,821,100,000
Total Assets $10,863,500,000
Intangible Assets $97,000,000
Total Liabilities $5,233,900,000
Shares Outstanding (Diluted Average) 370,300,000

Earnings Per Share History

Next Fiscal Year Estimate $1.98
Sep14 $1.50
Sep13 $1.33
Sep12 $2.77
Sep11 $0.23
Sep10 $0.77
Sep09 -$1.73
Sep08 -$8.34
Sep07 -$2.27
Sep06 $3.90
Sep05 $4.62
Sep04 $3.09
Sep03 $2.05
Sep02 $1.44
Sep01 $1.11
Sep00 $0.84
Sep99 $0.69
Sep98 $0.47
Sep97 $0.32
Sep96 $0.24

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.71
Sep14 $1.49
Sep13 $1.22
Sep12 $0.35
Sep11 -$1.33
Sep10 -$1.92
Sep09 -$2.43
Sep08 -$1.78
Sep07 $1.76
Sep06 $3.52
Sep05 $3.04
Sep04 $2.07
Sep03 $1.45
Sep02 $1.07
Sep01 $0.82
Sep00 $0.62
Sep99 $0.45

Recommended Reading:

Other ModernGraham posts about the company

The Best Companies of the Construction Industry – October 2015
The 20 Best Stocks For Value Investors This Week – 7/25/15
D.R. Horton Inc. Analysis – July 2015 Update $DHI
The Best Companies of the Construction Industry – June 2015
D.R. Horton Inc. Quarterly Valuation – April 2015 $DHI

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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