Wells Fargo: Forestar Group Has A 'Clear Path' To 54% EPS CAGR Growth

The bullish case for residential lot development company Forestar Group Inc. FOR is based on a "clear path" to delivering a 54% compounded annual EPS growth rate over the next two years, according to Wells Fargo.

The Analyst

Wells Fargo's Truman Patterson initiated coverage of Forestar Group with an Outperform rating and $23 price target.

The Thesis

Homebuilder D. R. Horton Inc DHI owns 75% of Forestar, which Patterson said implies the potential for not only strong earnings growth over the coming years but for lot sales to increase by ten-fold and total revenue to increase nine-fold. After all, D.R. Horton needs a consistent supplier of lots and the relationship has already increased Forestar's footprint from 14 markets to 41 markets over the past 18 months alone.

The recent momentum should translate to Forestar achieving its fiscal 2020 guidance of 10,000 lot deliveries and fiscal 2021 guidance of at least 20% growth, the analyst wrote in the note. The growth should be sustained beyond the coming two year period which makes Forestar a "growth story unlike any other in the housing sector."

Forestar also stands out against its peers as it's more akin to a land-heavy homebuilder as opposed to a traditional speculative developer, Patterons said, which comes with a higher risk profile.

Price Action

Shares of Forestar were trading flat around $19.82 Monday afternoon.

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