Standing out among the Street's worst performers today is D.R. Horton, a residential construction company whose shares slumped -4.0% to a price of $186.84, not far from its average analyst target price of $191.26.
The average analyst rating for the stock is buy. DHI underperformed the S&P 500 index by -4.0% during today's afternoon session, but outpaced it by 51.5% over the last year with a return of 90.5%.
D.R. Horton, Inc. operates as a homebuilding company in East, North, Southeast, South Central, Southwest, and Northwest regions in the United States. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
D.R. Horton's trailing 12 month P/E ratio is 12.6, based on its trailing EPS of $14.86. The company has a forward P/E ratio of 11.7 according to its forward EPS of $15.97 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the consumer discretionary sector has an average P/E ratio of 22.6, and the average for the S&P 500 is 29.3.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
D.R. Horton's PEG ratio of 1.7 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for D.R. Horton was $4.16 Billion as of its last annual report. Over the last 4 years, the company's average free cash flow has been $1.26 Billion and they've been growing at an average rate of 46.3%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in DHI have received an annualized dividend yield of 0.6% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). D.r. horton's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.48, but is still below the average P/B ratio of the Consumer Discretionary sector, which stood at 3.19 as of the third quarter of 2024.
Since it has a Very low P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with an upwards trend, D.R. Horton is likely overvalued at today's prices. The company has strong growth indicators because of a PEG ratio of less than 1 and strong operating margins with a positive growth rate. We hope you enjoyed this overview of DHI's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
