To The Moon

In today's edition, we will track the fundamental readings of long-term bullish companies in strong (TigerTrade Top 1 Gainer) concepts each week and look forward to your attention and discussion.

Disclaimer: Capital at risk. This is not direct financial advice or a recommendation to acquire or dispose of any investment, but for communication only.

3 of the 3 indexes closed red last week. Earnings are the name of the game, as investors focus on individual company performance. The major stock market indexes continue to lack direction in the meantime.

The best-performing industries are homebuilding, general merchdise stores, precious metals and minerals.

Considering the different perceptions of the stock, this time TigerPicks choose  $D.R. Horton(DHI)$ to have a fundamental highlight to help users understand it better.

$D.R. Horton(DHI)$

Recent data continues to suggest that pent-up demand for housing will support U.S. residential real estate prices while homebuilding activity remains suppressed by a shortage of skilled labour and materials. The reported uptick in new home sales further supports our view that homebuilders, in particular D.R. Horton, will continue to outperform and surpass pessimistic consensus expectations on earnings in the coming quarters.

Exaggerated News Headlines & Misplaced Hopes

Regular readers of financial media may have noticed that ever since the Fed embarked on monetary tightening, news headlines have grossly exaggerated the likelihood and extent of a potential collapse in the U.S. housing market. Any data release showing a dip in home sales or home prices was often accompanied by headlines such as "Housing Market Crash 2023", "20% Home Price Decline?", or "Signs Of A Housing Bubble". References to the 2008 subprime crisis were frequently made in comparison to the current market, and these dire warnings were usually loaded with phrases that suggest an impending crisis that may be equally bad, if not worse than 2008.

Yet one would find most forecasts calling for around a 10% decline in average home prices, which is not even close to what is usually referred to as a crash, crisis, or bubble.

Fact: As of January 2023, the S&P/Case-Shiller U.S. National Home Price Index shows home prices on average have only fallen by about 5% from the peak. Home sales have fallen by a lot for sure, and it is certainly true when compared to the sudden surge in home sales back in 2021, but home prices are holding up really well and nowhere near a collapse.

S&P/Case-Shiller U.S. National Home Price Index

S&P Dow Jones Indices LLC, fred.stlouisfed.org

The financial media's biased reporting on declining home sales and new housing starts instead of how resilient home prices have been, also suggests the intention of presenting an exaggerated view to boost readership. Guilty or not, the consequences are serious. Investor sentiment has become so overwhelmingly pessimistic that many seem convinced that the U.S. residential real estate market is in a bubble and that a crash is imminent.

From our perspective, however, pessimism surrounding the U.S. real estate sector has only created opportunities for value investors to pick up quality names such as DHI at really attractive discounts.

Still An Attractive Value Play

Despite the spectacular rally in DHI's share price, we note that on a price-to-earnings basis, the company remains undervalued in our opinion. TTM P/E ratio for DHI has only risen moderately from 4.4x in October to 6.3x at the time of writing.

Even in the bear case scenario in which we annualize last quarter's weakened EPS of $2.76 and assume that earnings will remain suppressed in the coming quarters, we would still arrive at a forward P/E multiple of 9.3x given DHI share price of $102.18 at the time of writing.

Let's take a step even further. If we assume EPS will halve again to just $1.38, DHI would still be trading at a forward P/E of 18.5x. Still cheaper than some technology stocks with no earnings at all!

Besides P/E multiples, DHI has also managed to deliver consistent returns for shareholders over the years. DHI's 5-year average ROE is running at 24%, with a healthy TTM EBITDA margin of 22.4%.

Stay Invested In DHI's Long Term Growth Potential

This bullish view is driven by a perverse supply-demand gap in the U.S. housing market that we think will take several years of accelerated new home construction to fill. This supply-demand gap explains the surge in home prices in recent years as housing inventory remains severely depressed. This phenomenon has also attracted the attention of institutional investors including Blackstone (BX), which has been buying up U.S. residential real estate in the Sun Belt states with the expectation that rents and home prices will continue to rise for several years.

Of course, the bears will point at the surge in home prices as a sign of a bubble. But we argue that high prices do not necessarily equate to speculative bubbles, especially if high prices are driven by real underlying economics. We have already highlighted the underlying economics and reasons for the U.S. housing supply shortage in our previous article, so we shall not repeat the discussion here.

But in short, those fundamental pressures driving higher home prices have not dissipated. Instead, higher interest rates and labour shortages are only exacerbating the supply-demand gap in housing as funding to construct new homes has become much more expensive while pent-up demand continues to build.

DHI's Skillful Management Team Has Been Underappreciated

DHI's competent management team, which has strategically positioned the company for growth in the Sun Belt states while skillfully navigating the current economic environment, is highly commendable and underappreciated by investors.

Chart showing DHI's growth in market share

DHI Q1 2023 Investor Presentation

According to DHI's Q1 2023 Investor Presentation, the company has been carefully optimizing its operations by reducing its homes in inventory to cope with cooling demand, while maintaining conservative homebuilding leverage and liquidity.

DHI existing home inventory

DHI Q1 2023 Investor Presentation

Chart showing DHI's cash flows

DHI Q1 2023 Investor Presentation

We are also delighted with management's decision to extend its share repurchase program (>US$1 billion worth of repurchases in fiscal 2023) to reduce share count, which will have a direct positive effect on ROE.

Finally, we admit that we have previously overlooked and underestimated management's decision to expand DHI's multi‐family and single‐family rental businesses back in 2020. The company's rental businesses have now become an important source of cash flow and serve as a strategic advantage to better navigate the current economic environment. DHI's rental platforms mean the company not only has the flexibility to turn unsold home inventory into rental properties, but the company will also benefit from declining home affordability that has pushed up rental prices.

Stock Price Forecast:

Here are the target price forecast for the future 12 months from analysts on CNNMoney.com.

The 15 analysts offering 12-month price forecasts for DR Horton Inc have a median target of 122.00, with a high estimate of 148.00 and a low estimate of 98.00. The median estimate represents a +14.45% increase from the last price of 106.60.

Hope this analysis helps you get more understanding of the company's whole image, Tiger Picks will follow up the monthly performance as a longterm track.

Resource:

https://seekingalpha.com/article/4595167-dr-horton-robust-fundamentals-cheap-valuations-skillful-management

What are your thoughts on $D.R. Horton(DHI)$?

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