Affordable Home Expansion And Suburban Migration Will Drive Resiliency

Key Takeaways

• Structural housing demand, favorable demographics, and expansion into entry-level homes support long-term volume growth, resilience, and broadened buyer appeal amid shifting market conditions.
  
• Vertical integration, efficient operations, industry consolidation, and disciplined financial management enable cost control, margin protection, and consistent market share gains.
  
• Rising affordability pressures, elevated incentives, and reliance on entry-level buyers heighten risks to margins and sales if market volatility and cost inflation persist.

Catalysts

Operates as a homebuilding company in East, North, Southeast, South Central, Southwest, and Northwest regions in the United States.

• D.R. Horton is well positioned to capture ongoing demand from the structural U.S. housing shortage and favorable demographic tailwinds, such as millennial and Gen Z household formation and continued suburban migration-supporting sustainable volume growth and topline revenue over the long term.
  
• The company's continued strategic expansion of entry-level and affordable home offerings enables it to address affordability concerns, tap into a wider buyer pool, and maintain high absorption rates, mitigating cyclical margin compression and sustaining revenue even in softer market conditions.
  
• Vertically integrated operations-including strong relationships with lot development partners like Forestar, internal mortgage financing, and focus on operational efficiencies-allow D.R. Horton to control costs, improve inventory turnover, and protect/enhance gross and net margins compared to less integrated competitors.
  
• Consistent and substantial share buybacks, disciplined balance sheet management, and robust operating cash flow generation are likely to drive double-digit returns on equity and support higher earnings per share, regardless of short-term market fluctuations.
  
• Expanding geographic footprint and share gains in Sunbelt/secondary markets, coupled with industry consolidation as smaller builders struggle to compete, position D.R. Horton for incremental market share growth and revenue resiliency as long-term trends continue to play out.

D.R. Horton Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming D.R. Horton's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.5% today to 11.4% in 3 years time.
• Analysts expect earnings to reach $4.7 billion (and earnings per share of $18.78) by about September 2028, up from $4.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the US Consumer Durables industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.56%, as per the Simply Wall St company report.

D.R. Horton Future Earnings Per Share Growth

Risks

• Rising sales incentives and flat to declining average selling prices indicate ongoing affordability pressures and cautious consumer sentiment, which may result in lower net margins and constrain revenue growth if market conditions remain volatile or worsen.
  
• Lot and land cost inflation, with underlying trends showing mid-single-digit year-over-year increases, poses a structural risk to gross margins if home price appreciation does not offset these rising costs over time.
  
• Heavy reliance on the entry-level and first-time homebuyer market, which comprised 64% of mortgage closings, exposes D.R. Horton to elevated risks from economic downturns, credit tightening, and wage stagnation, potentially leading to higher cancellations and lower sales volumes.
  
• Ongoing need for higher incentives (including mortgage rate buydowns) to sustain sales pace suggests increased competition from both new and resale markets, which could structurally erode gross and net margins if industry-wide pricing power weakens.
  
• Large land and spec inventory positions, while providing operational flexibility, create exposure to impairments and write-offs in a declining market, as exemplified by the recent $16 million in inventory impairments and $36 million in option deposit write-offs, negatively impacting earnings and return on assets.

Valuation

• The analysts have a consensus price target of $162.6 for D.R. Horton based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $199.0, and the most bearish reporting a price target of just $110.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $41.5 billion, earnings will come to $4.7 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 8.6%.
• Given the current share price of $177.88, the analyst price target of $162.6 is 9.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.