3 Reasons to Avoid DHI and 1 Stock to Buy Instead

Since September 2020, the S&P 500 has delivered a total return of 91%. But one standout stock has nearly doubled the market - over the past five years, D.R. Horton has surged 163% to $184.33 per share. Its momentum hasn’t stopped as it’s also gained 37.6% in the last six months thanks to its solid quarterly results, beating the S&P by 21.9%.

Is there a buying opportunity in D.R. Horton, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is D.R. Horton Not Exciting?

We’re happy investors have made money, but we're cautious about D.R. Horton. Here are three reasons there are better opportunities than DHI and a stock we'd rather own.

1. Backlog Declines as Orders Drop

We can better understand Home Builders companies by analyzing their backlog. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into D.R. Horton’s future revenue streams.

D.R. Horton’s backlog came in at $5.34 billion in the latest quarter, and it averaged 17% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for D.R. Horton, its EPS declined by 5.8% annually over the last two years while its revenue was flat. This tells us the company struggled to adjust to choppy demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, D.R. Horton’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

D.R. Horton isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 15.6× forward P/E (or $184.33 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.

Stocks We Like More Than D.R. Horton

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