Posted: 10 Nov 2003 05:05 pm Post subject: DHI ==> The $$$MR. MARKET$$$ Veterans Day Pick -------------------------------------------------------------------------------- Sometimes $$$MR. MARKET$$$ just loves to prove to the world that heâs 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 hoâ¦you murder me. Iâve 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. Itâs 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. Hereâs why I like DHI: DHI stock is up 138% over the last 12 months, yet its P/E is still a humble 11. Itâs R^2 correlation coefficient, over the same period, is a rock solid 0.89 which indicates price momentum that has been incredibly steady. DHIâs 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. Theyâve 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 companyâs ability to generate free cash flow by stepping up their dividend. Thatâs 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. Hereâs the big boss gloating, âWe 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." DHIâs 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. Thereâs just too much inertia for anyone to step in front of this train and stop it right now. So nice try Mr. ANALystâ¦weâll see you under the tracks. Next time, why donât you pick Baylor to beat Oklahoma? You might have a better chance of being correct.