Barclays: Homebuilder DR Horton Deserves Premium Valuation

Shares of homebuilder D. R. Horton Inc DHI are trading at just 1.9x an estimated first quarter 2019 tangible book value of $23.21 — which undervalues the stock, according to Barclays.

The Analyst

Barclays' Matthew Bouley upgraded D.R. Horton's stock from Equal Weight to Overweight with an unchanged $52 price target.

The Thesis

D.R. Horton is positioned to take full advantage of the strong housing environment and can maintain its gross margins while also generating sustainable ROEs, Bouley said in the upgrade note. (See the analyst's track record here.) 

The homebuilder has the best exposure to entry-level housing demand with Express, while its core Freedom brand should see further community count growth, with approximately three sales per community per month in 2019, according to Barclays. 

This exposure level is the "right one for a post-liftoff world" as rising interest rates shift demand to lower price points, Bouley said. D.R. Horton's lower overall price point — 35 percent below the builder average — makes it "relatively insulated" from negative changes in the overall housing market, the analyst said.

The company's strong local scale implies it is better positioned to navigate inflation in labor and material costs, he said. 

Investors shouldn't expect the homebuilder to oversee a large-scale share repurchase program, Bouley said. Instead, the company could deploy its cash to invest in its business, lower its debt load and potentially increase the dividend, he said.

D.R. Horton could oversee such an initiative when its net debt-to-capital ratio becomes "minimal" or cash flow comes in higher than anticipated, Bouley said. 

Price Action

Shares of D.R. Horton were trading higher by more than 2 percent Monday morning.

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