D.R. Horton

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

D.R. Horton is the largest home construction company in the United States, known for its diverse range of offerings, from entry-level homes to luxury residences, and its operation across various states and regions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: D.R. Horton (DHI) is the largest homebuilder in the United States with operations in 101 markets across 33 states. They’re primarily engaged in the construction and sale of single-family homes, with a growing presence in multi-family rental and active adult communities. The company also provides mortgage and financial services to its customers through a wholly-owned subsidiary, DHI Mortgage.

  • Geographic Diversification: DHI operates in 17 different geographical areas: Northwest, Southwest, South Central, Southeast, Midwest and East.
  • Revenue Mix: The company’s revenue is generated primarily from home sales, with smaller portions derived from financial services and rental properties.
    • For the nine months ending June 30, 2024, homebuilding segment revenue accounted for the majority of its revenue (approximately $24.5 billion).
    • Financial services represented approximately $768 million in revenue.
    • Rental segment contributed about $100 million.

Industry Trends: The homebuilding industry is highly cyclical and influenced by macroeconomic factors, such as interest rates, inflation, and employment levels. Despite the high interest rate environment in 2022 and 2023, DHI’s revenues continued to grow (albeit at a much lower rate than 2021) due to increase in sales prices. This indicates an increased ability to extract revenues from their customers.

  • Housing demand: Although there are signs that housing is becoming more affordable, there is a general trend of home sales declining.
  • Mortgage rates: High mortgage rates are expected to lower demand for housing going forward.
  • Interest rates: High interest rate environment is causing uncertainty for the entire market.
  • Inflation: Inflation can also increase construction and land costs, which could hamper revenues for homebuilders.
  • Labor market: While there are some indicators that the economy is cooling down, job growth in the US is still strong. However, labor market imbalances can drive up labor costs.
  • Land market: DHI has been able to improve the rate of land sales, in particular, with a focus on land owned and controlled and that would lead to higher gross profit margins.

Moat Analysis:

While DHI is the largest player in its field, a truly wide and sustainable moat is not fully developed. It relies heavily on the value of its brand name, expertise, and its operational efficiencies in production and sales to maintain profitability.

  • Brands: While D.R. Horton enjoys a solid brand name, it doesn’t provide much of a sustainable advantage because of relatively low switching costs for consumers.
  • Distribution: DHI has a good distribution network, especially in North America. They manage to sell their homes all over America. However, this alone isn’t enough for a sustainable moat, as a well-financed competitor can easily replicate their distribution channels.
  • Scale: DHI does have significant economies of scale, by being the largest homebuilder in the U.S., but it’s hard to say that the advantage that they have from economies of scale gives them a durable moat.
  • Switching costs: For the average consumer, there is almost no switching cost associated with buying a D.R. Horton house over a competitor’s house.

Given these factors, I believe D.R. Horton has a narrow moat that is relatively weak, mainly stemming from location based scale. However, because these moats are easily replicable, they are only moderately durable and that warrants a moat rating of: 2/5.

Risks to the Moat and Business Resilience:

  • Cyclical Industry: The most substantial risk for DHI is its exposure to the highly cyclical nature of the housing market. Economic downturns, high interest rates, and reduced consumer confidence can significantly affect housing demand. Historically, a slowdown in the economy has a significant impact on a homebuilder’s financials.
  • Interest Rate Sensitivity: The company’s sensitivity to interest rates poses a major risk. Higher rates lead to higher mortgage costs for buyers, potentially depressing demand and creating volatility in stock prices.
  • Inflation: Inflation increases construction, material and labor costs, which can lower margins and profitability for DHI.
  • Competition: The homebuilding industry is highly competitive, with many regional and national players that can create a price war, making the company’s profit margins much worse. This is partially mitigated by DHI’s scale advantage, but it doesn’t prevent competitors from nibbling at the edges.
  • Land Inventory: DHI’s performance is closely tied to the value of land it holds in its inventory and its ability to effectively sell the land it owns. A downturn in real estate value can lead to substantial losses for DHI.

The company demonstrates a good degree of resilience given its focus on lower-cost homes, which can still be sold even when the market is in a slowdown. However, they are still extremely sensitive to the economic environment. Because they cannot change market forces, this places their business in a somewhat vulnerable position.

Financials:

D.R. Horton has experienced fluctuations and volatility in their finances.

  • Revenues: D.R. Horton had revenue of $24.5B in its homebuilding segment during the 9-months ended in June 30, 2024 compared to $24.59B during the same period in 2023.
    • This decrease in revenues can be accounted for because of the cooling down housing market.
    • DHI was able to offset some of the impact of lower sales by raising sale prices.
  • Net Income: DHI has had a net income of $3.44B for the nine months ending June 30, 2024 compared to $3.7B during the same period in 2023.
  • This decrease in net income can also be explained by the economic conditions of the market.
  • Profitability: Although the housing market has cooled off, DHI continues to be extremely profitable. They have a net margin close to 14% as of 2024. This indicates they have some pricing power and they can handle increasing costs.
  • Debt: DHI has a large amount of debt on its balance sheets and has a debt to equity ratio of around 50%. This does mean that their financials are very levered, but for a long-term business like homebuilding, this is not as problematic as other businesses.
  • Balance Sheet: Overall DHI’s balance sheet is quite healthy. They have large amounts of cash, and manageable debt and liabilities.

The main concern with DHI is its sensitivity to debt and economic factors, but the business’s fundamentals are quite strong. The financials are good, if not great, and hence a health score of 4/5 is warranted.

Understandability

Homebuilding is a fairly simple business to grasp: you develop land, build houses, and sell them. However, some complexities that make it somewhat harder to fully comprehend for a general investor:

  • The company sells multiple types of houses in a variety of locations. This makes it tough for an investor to grasp where exactly the business is focusing and where their revenues come from.
  • Financial statements for homebuilders can be complex. Investors have to understand the different concepts like inventory of land, houses, joint ventures, etc, which aren’t present for the typical consumer-focused business.
  • Valuations for a business like a homebuilding business are complicated, because you need to account for the cyclicality of the market, interest rates, etc.

Considering all these factors, I believe that DHI has an understandability score of 2/5.