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AUTHOR
DATE
SUBJECT
7
member
7/11/24 12:27AM
Re: Re: Author Exit Recommendation
6
I ultimately think home affordability will get worse from current levels over the next year or two, which is worse than what I had underwritten. Even as a structural beneficiary, I don't think homebuilders are going to do that well in that type of environment
I agree with starfox - the high level thoughts are compelling, but I don't understand how that translates into a higher stock price. The simple home affordability math suggests that homebuilders either need to take material impairments or suffer weak ROEs for the next 3-5 years. DHI is less than 10% off its all-time high, while facing a clearly worse fundamental outlook versus 12-18 months ago. I would love for you to walk us through the quantitative rationale for why DHI should be trading at a materially higher stock price.
Homebuilders that will best navigate the current market are those who can continue to grow community count / supply. While I generally think this applies to many of the public homebuilders, the best situated homebuilders are 1) ones that can self-fund growth (who can capitalize on this opportunity the quickest), 2) those that have supply-side advantage, and 3) management team who is clearly seeing the market and making the right calls. DHI fits that mold the best, although appropriately trading at a premium. I also own LEN and MTH.
My upside/downside for DHI is ~$185 / ~$62 in 2025. Didn't include thoughts around earnings or valuation in the write-up as that will largely be dictated by macro view, and purpose of this write-up was to clearly frame why the housing market is structurally different from the ones that came before and why homebuilders are well positioned. Upside / downside depends on 1) what you think the new home market looks like in either higher for longer regime or a hard landing with secular inflationary backdrop (or whatever your upside/downside macro view is) and 2) what the idio market share gain might be in those two different scenarios.
Agree with your analysis in general but didn't see any thoughts on earnings / valuation. With the understanding that projection is kind of a stab in a dark right now, how do you think about upside/downside cases here over the next several years? Also - why Horton as opposed to Lennar, LGI, or other builders focused on entry level rather than move-up buyer (who as you note is more challenged by being locked in to existing rates).
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