Since laying the foundation in Forth Worth, Texas back in 1978, Arkansas-bred Donald R. Horton’s homebuilding business, D.R. Horton (DHI), has grown to become the largest residential developer in the United States by volume of closings (16,695 in fiscal 2011). It is the second largest by revenue, which was quoted at approximately $3.6 billion at the end of its fiscal 2011, under Pulte Homes (PHM), which pulled in $4.1 billion in revenue during its fiscal 2011. Horton is now one of the most competitive outfits leading the business and is arguably one of the best investment choices in the homebuilding industry.

Following just over a decade of accelerating growth between 1978 to 1989, a healthy appetite for acquiring residential home construction and development businesses had enabled the company to expand beyond the Dallas-Fort Worth market. In 1991, Horton was incorporated in Delaware, and a year later the company went public on the New York Stock Exchange. Over the past 20 years, Horton has continued its growth-by-acquisition strategy and made some major deals, including purchases of the Torrey Group and Schuler Homes, along with its pivotal merger with Continental Homes, all of which have helped the company to establish its formidable position in the industry today.

Nonetheless, the housing market collapse and ensuing recession had crippled the equities of the companies in this industry, Horton included. The stock endured precipitous price declines and remained in the doldrums, along with its industry peers, from 2007 through late 2008, when it began to turn a corner. After picking up some steam in 2009, the equity had essentially been somewhat range bound, until recent months when it broke through four-year limits and tested new highs. Indeed, more encouraging news from the housing sector of late has helped to propel the stock.

As the National Association of Home Builders/Wells Fargo confidence index continues to point toward greater stabilization and even upward momentum, the outlook for DHI has improved substantially. Although the economy remains under duress and high unemployment is expected to constrain any notable stock price increase in the near term, less expensive properties and record-low mortgage rates are enticing more and more buyers. This shift is helping to bolster revenue and profits this year, following a tough 2011 (when premature and exaggerated economic recovery expectations in 2010 were quelled by a broad-based correction).
Notwithstanding the looming specter of the “fiscal cliff” that threatens to derail the nation’s still-fragile economic recovery, market indicators suggest that investors believe some of the more financially sound homebuilders, like Horton, are due for a sustainable rebound. Indeed, the company’s debt-to-capital ratio is relatively reasonable, and its liquidity is strong.

On the other hand, others argue that there is limited room for appreciation from the current quote, as recent positive momentum has left the stock somewhat richly valued. There is a fear that some of these stocks are overbought and not reflecting the inherent risk that still burdens the housing market. Evidence to support this contention can be found in the yields of Horton’s below-investment-grade debt (based on the consensus of leading rating agencies), where yields have been in line with some investment grade bonds. This suggests a level of credit quality that many critics claim is simply not realistic, given the delicate state of the economy.

All told, D.R. Horton is one of the least leveraged companies in the homebuilding industry. Moreover, its recovery prospects are among the more-favorable and better defined of the group. Assuming the necessary political decisions are made to sustain and, perhaps fuel economic growth in the coming years, long-term price targets for this issue may well prove conservative.

At the time of this articles writing, the author did not have positions in any of the companies mentioned.