Another HUGELY successful $$$MR. MARKET$$$ pick

Posted: 10 Nov 2003 05:05 pm Post subject: DHI ==> The $$$MR. MARKET$$$ Veterans Day Pick

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Sometimes $$$MR. MARKET$$$ just loves to prove to the world that he’s oh so so good. Last week, the homebuilding stocks were downgraded by an ANALyst who decided they were priced too high due to the fact that our economy was heating up. The theory is that when the economy heats up, interest rates will rise and homes will no longer be affordable. Ho ho ho…you murder me.

I’ve got news for you, Mr. and Mrs. ANALyst. The economy is heating up because the job market is stronger, consumers are feeling better and they are willing to spend more money. The reason interest rates are going to go up is the very same reason why consumers are going to be MORE likely to buy homes, not less likely. It’s true rates will creep up, but the absolute rates are still very very very low. (I project average 30-year mortgage rates of 6.3% in 2004).

While the red hot pace of new home sales may leave some skeptical observers wondering if a significant slowdown may be in the offing, expect home sales to remain strong through the end of 2004. Mortgage rates will remain accommodating through the period, and the improving economy will leave consumers comfortable about taking the plunge to buy an expensive asset such as a home, even if interest rates move up modestly. There has never been a better time to own a home. Exceptionally low rates enable renters or those who own modest homes to afford their first home or something nicer than what they have. Do you remember when rates were in the teens? Guess what? People were buying houses then, also.

Today I bought DHI (D.R. Horton) at 40.23. I will sell it in 4 to 6 weeks at 46.42. Here’s why I like DHI:

DHI stock is up 138% over the last 12 months, yet its P/E is still a humble 11. It’s R^2 correlation coefficient, over the same period, is a rock solid 0.89 which indicates price momentum that has been incredibly steady.

DHI’s boss also agrees with $$$MR. MARKET$$$. "The best thing that could happen to D.R. Horton and the home building industry in general is for interest rates to go up about 200 to 250 basis points," said CEO Don Tomnitz. "I say Horton wins both ways if rates go down, that increases the pool of affordable buyers. If rates go up, the economy is doing well, and our second- and third-time home buyers are doing well."

DHI has recorded tremendous sales and profit growth over the past decade. They are the #2 US homebuilder. Its sales have risen at a compounded annual growth rate of 43% over that time, and its earnings per share have posted compounded gains of about 30%. DHI is, simply put, an earnings machine. They’ve proven, over a long period of time that they know how to grow their business and their formula works. Horton's excellent performance stems from an active takeover program plus a focus on internal growth. The company has also benefited from its concentration in demographically favorable areas such as California and Arizona. (Sorry to say, there will be more homebuilding in these areas due to the wildfires.) On top of these factors, Horton is benefiting from its large size and financial muscle, which give it a major advantage in obtaining big land holdings in desired areas. Expect these conditions to drive further growth in coming periods.


D.R. Horton's net sales orders jumped 21% to $2.41 billion in the fiscal third quarter ended Sept. 30, as orders rose 17% to 10,114 homes. ANALysts expect D.R. Horton to post a 41% profit rise to $1.30 a share in the fiscal fourth quarter. $$$MR. MARKET$$$ knows that they will do $1.41 a share next quarter.

ANALysts are projecting $4.33/share in 2004. Even with the paltry P/E of 11.26, this projects to a stock price of $48.76. $$$MR. MARKET$$$ projects 2004 earnings of $5.22 which will get the stock price to $58.88. These gains will be driven by a 10% increase in home closings, and a modest rise in average selling prices. In reality, the P/E will most likely expand as these homebuilders post quarter after quarter of magnificent earnings. Indeed, buyer-friendly mortgage rates will remain through 2006, so valuations for most major builders will expand to low double-digit forward price/earnings ratios.

Even though DHI is a mega Godzilla homebuilder, its structure is still entrepreneurial. Horton has 50 profit center managers who have control over their local markets and can land big bonuses if their profits are good. They work hard for themselves and, as a result, for the company.

DHI declared a quarterly cash dividend of 7 cents per share, a 17 percent increase over its payout in the same period a year earlier. Since reducing dividends is a Wall Street disaster, DHI clearly indicated to the world that they have full confidence in the company’s ability to generate free cash flow by stepping up their dividend. That’s not enough to convince anyone? Try this one. the Company has repurchased approximately $29.3 million (980,300 shares) of its common stock in its fourth fiscal quarter ended September 30, 2003. For the fiscal year then ended, common stock repurchases totaled approximately $58.9 million (2,652,800 shares). The Company has approximately $175.6 million remaining on its stock repurchase authorization.

Here’s the big boss gloating, “We are extremely pleased with the Company's double-digit sales increase. The excellent sales results in our fourth quarter, combined with our strong backlog, position the Company for a strong start to another record year in fiscal 2004." DHI’s backlog in June was $4.0 billion.

Key financial ratios also point to DHI as being a top tier performer. Return on assets is 8.4% while Return on Equity is 23%.

DHI is really an example of a great $$$MR. MARKET$$$ momentum stock. This stock is like a freight train moving faster and faster. True, eventually there will be macroeconomic conditions that will slow this train down, but while it is slowing down, its stock price will keep going up. There’s just too much inertia for anyone to step in front of this train and stop it right now. So nice try Mr. ANALyst…we’ll see you under the tracks. Next time, why don’t you pick Baylor to beat Oklahoma? You might have a better chance of being correct.

 

Thanks for the heads up there dude on DHI. 11 PE, wow, that's low, except that is about at the historical high end for homebuilders.

Incidentally, you know a good place in Princeton where a guy can get an R&T?

 

nice job. thats about the best analysis of a stock pick ive seen on elite in some time.

 

You don't mean a Rum & Tonic I presume....

 

True...but as they continue to generate incredible amounts of free cash flow, their book values will get so high, relative to their stock price, that they will either:

1. Increase their dividends
2. Buy back stock
3. be purchased by another homebuilder seeking growth and "cheap" earnings.

In the end, all good things for shareholders.

 

1) Housing is cyclical, no matter how rosy it is currently
2) There is no proprietary product, little to no branding.
3) The house is the at the low end of the profit spectrum in the real estate industry. Land is where the biggest money is.
4) You build a home, you sell it. It's a closed circuit. And you must have the land to make the product, plus zoning, provided there is demand. It's not a wealth generator in the sense that commercial real estate can be, or a consumer product with a good brand that can be easily manufactured and distributed. There will always be a new drink, a new snack, a new electronic product, a new service, but homes are determined by demographics and availability of land where demand exists. You can't distribute homes. Plus, most homes are built by independents.

That is why homebuilders traditionally sell for 5-10 PE because they are not worth much more than book.

Not that homebuilders can't be a good investment, its just that they are the best investment when the real estate cycle is in the earlier stage and the PEs are lower.

No, I did not mean a rum and tonic, although tonic is along my lines of thinking.

 

Why pick? How pick? Buy the whole market now. 100% up room to go.

 

You're right in your comment that land is where the money is, but you're missing a key fact. It's not really the land, it's the building approval process that generates the value. And that's where the big boys shine. They have the political muscle , the legal firepower and the patience to wear down the no-growth forces and get approvals for huge tracts. The pickup truck independents are at an increasing disadvantage, due to this factor and also the big boys ability to get much sweeter deals on materials and utilize labor more efficiently. They also typically have mortgage subsidiaries that both guarantee access to financing and also generate extra profits. These factors are not exactly unrecognized by Wall Street, but as $$$MrMarket$$$ notes, the stocks are still cheap. The big question is are they still crappy cyclicals or have they graduated to a permamently higher valuation range. Time will tell, but they weathered this recession without missing a beat.

MrMarket, Why DHI? Is there something there that makes it better than any of the others in the group like RYL, LEN, TOL, etc?

 

Thank you, at least one person in this thread knows real investing.

I would be just a little cautious with anything involving real estate due to the bubble. You know, the tremendous refinancings and home loans thanks to cheap money. Once rates rise, homebuilders will see a serious slowdown.

 

If he's holding it for only 4-6 weeks, it's not an investment.