Valens Equities Weekly Equity Idea Highlight for September 21, 2016 – D.R. Horton, Inc.

This week, the Valens Securities team highlights our most interesting equity insight from across our tools and our analysis.

D.R. Horton, Inc. (DHI): Management’s smart strategic decisions, low market expectations, and positive fundamental momentum around bottom-line and top-line trends builds the case for equity upside

The market is expecting DHI to see recent positive fundamental momentum trends reverse going forward. The market expects the company, which recently reached 10% ROA’ for the first time since the housing crisis, to see ROA’ decline back to cost-of-capital 6% levels, with Asset’ growth also slowing dramatically from recent years.

However, DHI has been among the best of its peers in terms of improving the business through the recovery. DHI management also has been intelligently focusing their business on the lower end of the market over the last several years, in their Express segment, an area other homebuilders have abandoned. This has given them an opportunity to grow in areas not challenged by competitors, another reason to expect sustained stronger performance.

Furthermore, over the last several quarters, management has started to show more confidence in their operations and outlook, as the market has stabilized. During the Q1 and Q2 2016 earnings calls, management generated confident markers when talking about the lack of competition they are seeing in the Express Homes segment, and their ability to take share and reduce incentives while driving growth. They also were confident about their outlook for both top-line growth and profitability, and in particular when discussing their 2017 guidance for revenue and margins, very bullish indicators for future performance.

Considering low market expectations, management’s smart strategic shift, improving ROA’ and their building confidence about their outlook for the business, there appears to be equity upside potential for DHI.