Inside Wall Street: Get into housing -- fast
D.R. Horton remains undervalued even though its stock continues to outperform.
The housing industry has defied all expectations as it's started and sustained a recovery that many observers figured could not happen -- and fast. But now doubts have re-emerged as the rally by the once-beleaguered housing stocks has slowed and given up some of its earlier gains. However, belittling the industry's comeback efforts could prove hasty -- and costly in lost opportunities.
The housing recovery, as fragile as it might look, will persist and build up speed as the economy's upward momentum quickens, according to several industry pros. Certain stocks that outperformed last year and are holding on to their gains will likely continue to pick up steam, but the more enticing ones at this point are the fundamentally strong stocks that continue to show upward momentum.
D.R. Horton (DHI), one of the largest homebuilders in the U.S., is one of those choice stocks that performed well in 2012 and continues to outperform. "D.R. Horton delivered a standout quarter (first fiscal quarter), improving across all operating metrics and geographies," says analyst David N. Williams of Williams Capital Markets.
He notes that new order growth, which had been expected to moderate given the firm's solid performance last year, improved well beyond expectations and was at the highest year-over-year level since 2002. "Although year-to-year comparisons will become increasingly in the longer term, we believe current land spending and finished lot inventory provide ample new order growth opportunities," says Williams.
Rating Horton as a "buy," Williams says the company's diversified products, profile of its buyers, and geographic mix, "combined with some of the attractive price points in the industry will capture a growing level of demand as the cycle accelerates." And volume leverage and pricing power "should drive increasing earnings power likely ahead of our more conservative estimates," says Williams.
So he has raised his price target to $27 a share, at 17 times his adjusted 2013 earnings per share of $1.59. He also has raised his 2013 revenue forecast to $6.15 billion from $5.47 billion. Currently trading at $23 a share, the stock hit a 52-week high of $25.5 on March 20, 2013, well above its 52-week low of $14.37. In October 2011, Horton's stock fell to as low of $8.45 a share. Its recovery since then has been robust.
Analyst Jay McCanless of investment firm Sterne Agee rates Horton a "buy" with a higher price target of $29 a share, or 20 times his earnings estimate for fiscal 2014 of $1.46 a share. The company has been raising prices in all of its markets due to less competition from existing homes for sale. Such pricing power, says McCanless, should produce multi-year double-digit earnings-per-share growth.
Indeed, demand appears to be growing for Horton's homes. In fiscal 2012, which ended on Sept. 30, Horton unit backlogs jumped 49.2% while closings increased 13.1%. And fiscal 2013 first quarter results, notes McCanless, didn't indicate any slowdown with closings up 25.8% year-over-year, and backlogs up 61.5%.
He's aware that comparisons could become more difficult for Horton as the cycle progresses. But neighborhood growth in 2013, he notes, may mitigate that issue. He expects neighborhood growth and pricing power could increase opportunities and become catalysts for earnings upside surprises.
Ranked as No. 1, or strong buy, in homebuilding by Zacks Investment Research, Horton operates in 77 markets in 26 states, selling homes priced between $100,000 and $600,000. Even some analysts who are bearish on the housing stocks in general have a favorable outlook on Horton.
Michael R. Widner, analyst at investment firm Stifel Nicolaus, notes that now that the "valuation spread is tight," investors who want to buy builders should choose Horton, whose "strong results, strong balance sheet, continued share gains, best-in-class execution and broad geographical footprint, rank it among our favorites, albeit it’s in a group we find a bit too expensive."
He notes that Horton's results in the fiscal first quarter of 2012 were impressive: it posted first quarter earnings of 20 cents a share, well above his 12 cents estimate and the consensus' 14 cents forecast. He thinks the housing sector is "expensive" and on that basis, he says, he "isn't telling anyone to buy builders." But for investors seeking entry into housing, "DHI looks like an easy choice to us," says Widner.
Although his official rating on the stock is a hold, Widner says that "in our view, it warrants a valuation premium that it currently doesn't have."
Gene Marcial wrote the column Inside Wall Street for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
Seems like i remember a "know it all" recommended getting into stocks just before the .dot crash.
real good advice.
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