What’s Next For D.R. Horton Stock?

D.R. Horton (NYSE: DHI), an American home construction company, is up 12% in the last month, outperforming the S&P 500’s 4% gain. While the company didn’t release any financial or operational updates recently, the rally was part of a broader sector-wide upswing driven by improving housing market sentiment. That said, if you seek upside with lower volatility than individual stocks, the Trefis High Quality portfolio presents an alternative, having outperformed the S&P 500 and generated returns exceeding 91% since its inception.

Optimism in housing is rising as mortgage rates ease from nearly 7% to around 6%, boosting affordability and buyer activity. With more listings and less investor demand, buyers are regaining leverage. The National Association of Realtors estimates that if rates hold near 6%, 6.2 million households could afford a median-priced home, potentially reviving sales. For homebuilders, that may mean a rebound in demand, supported by a decade of underbuilding and steady demographic growth.

Image by Paul Brennan from Pixabay

Is DHI Stock a Buy?

DHI stock trades well below its 52-week high of $197, currently hovering near $140. On the surface, the valuation looks appealing, especially compared to the broader market. D.R. Horton trades at a price-to-sales ratio of 1.2, far below the S&P 500’s 3.1. Its price-to-earnings ratio stands at just 10.5 versus the benchmark’s 26.9, and its price-to-free cash flow is also lower at 15.0 compared to 20.9. These numbers suggest that investors are paying much less for every dollar of the company’s revenue, profit, and cash flow. However, a closer look at the fundamentals reveals a more complicated picture.

While the U.S. housing sector shows long-term strength, D.R. Horton’s recent operational trends raise some red flags. Revenue growth has averaged just 5.3% annually over the past three years, slightly behind the S&P 500’s 5.5%. Over the last 12 months, revenue declined by 4.7% to $35 billion, and in the most recent quarter, sales dropped 15.1% year-over-year to $7.7 billion, while the broader market posted modest gains. Profitability is mixed. DHI maintains an operating margin of 15.1% and a net income margin of 12.2%, which are solid, but its operating cash flow margin of 8.1% lags significantly behind the S&P 500’s 14.9% average. On the financial stability front, the company appears reasonably sound, with $6.6 billion in debt and a modest 16.1% debt-to-equity ratio—slightly better than the S&P’s 19.4%. It also holds $2.5 billion in cash, or about 6.9% of its total assets, which offers some financial flexibility.

The Bottom Line

Putting it all together, D.R. Horton’s valuation may look cheap, but that discount is arguably justified by weak recent growth and middling profitability. The stock has potential upside if housing data continues to improve, but its mixed fundamentals make it a cautious buy at current levels.

While it doesn’t look like there is currently much upside to DHI stock, the Trefis Reinforced Value (RV) Portfolio has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors. Why is that? The quarterly rebalanced mix of large-, mid- and small-cap RV Portfolio stocks provided a responsive way to make the most of upbeat market conditions while limiting losses when markets head south, as detailed in RV Portfolio performance metrics.