Weekly Equity Idea Highlight - 2018 03 07
The market is expecting DHI to see recent positive fundamental momentum trends reverse going forward. The market expects the company, which recently reached 11% UAFRS-based (Uniform) ROA for the first time since the housing crisis, to see Uniform ROA decline back to 7% levels, with Uniform Asset growth also slowing dramatically from recent years.However, DHI has been among the best of its peers in terms of improving the business through the recovery. DHI management also has been intelligently focusing their business on the lower end of the market over the last several years, in their Express segment, an area that other homebuilders have abandoned. This has given them an opportunity to grow in areas not challenged by competitors, another reason to expect sustained stronger performance.
Furthermore, management alignment, which focuses them on improving profitability, improving returns faster than peers and also growing the business should align management to pursue longer-term strategies that create value for shareholders. Finally, while management did show concerns about integrating a recent small acquisition, their continued confidence about their balance sheet positioning, growth fundamentals and overall outlook for the business point to continued strong fundamental momentum.
Considering low market expectations, management's smart strategic shift, improving Uniform ROA and the outlook for the business, there appears to be equity upside potential for DHI.
D.R. Horton is a homebuilding company. The company's business operations consist of homebuilding, a majority-owned residential lot development company, financial services and other activities. The company's financial services operations provide mortgage financing and title agency services to homebuyers in its homebuilding markets. The company's subsidiary, DHI Mortgage, provides mortgage financing services primarily to its homebuyers and generally sells the mortgages it originates and the related servicing rights to third-party purchasers. The company's subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to its homebuyers.
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