D.R. Horton’s stock price has taken a beating over the past six months, shedding 34.4% of its value and falling to a new 52-week low of $125.20 per share. This may have investors wondering how to approach the situation.
Is now the time to buy D.R. Horton, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Even with the cheaper entry price, we're swiping left on D.R. Horton for now. Here are three reasons why DHI doesn't excite us and a stock we'd rather own.
Why Is D.R. Horton Not Exciting?
One of the largest homebuilding companies in the U.S., D.R. Horton (NYSE: DHI) builds a variety of new construction homes across multiple markets.
1. Backlog Declines as Orders Drop
In addition to reported revenue, backlog is a useful data point for analyzing Home Builders companies. 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 $4.30 billion in the latest quarter, and it averaged 22.2% 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 6.3% annually over the last two years while its revenue grew by 4.4%. This tells us the company became less profitable on a per-share basis as it expanded.
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. Over the last few years, D.R. Horton’s ROIC has unfortunately decreased. 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 quality test. After the recent drawdown, the stock trades at 8.9× forward price-to-earnings (or $125.20 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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