D.R. Horton stock is hot

Shares of the biggest U.S. homebuilder are in the midst of their biggest rally since 2005. But is it for real?

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Scott Cendrowski, reporter

david_goldberg.03.jpg
The Bear: David Goldberg, UBS
dhi.mkw.gif
kenneth_leon.03.jpg
The Bull: Ken Leon, Standard & Poor's
How are you doing financially compared to the start of the year?
  • Better
  • Worse
  • About the same
CDs & Money Market
MMA 0.36%
$10K MMA 0.33%
6 month CD 0.34%
1 yr CD 0.66%
5 yr CD 1.34%

Find personalized rates:
 

Rates provided by Bankrate.com.

NEW YORK (Fortune) -- The housing market is still struggling, but D.R. Horton stock is surging.

Shares of the largest U.S. homebuilder have risen more than 80% this year (vs. an 18% rise in S&P 500) as buyers respond to the $8,000 tax credit for first-time homebuyers, relatively low mortgage rates, and a drop in prices.

Even as sales improve, however, Horton (DHI, Fortune 500), known for affordable houses in the Sunbelt, continues to lose money. In the third quarter it reported its ninth straight quarterly loss after it wrote down the value of land for development purchased in peak years.

Can Horton shares continue their run? We talked to two analysts for their take.

The Bear: David Goldberg, UBS

D.R. Horton's stock has run up 56% since July. We think a lot of the rise was based on unrealistic expectations of a V-shaped recovery in the housing market. We expect a housing recovery to be gradual.

We downgraded the stock to a sell rating in early September.

D.R. Horton has a very large land position -- it controls about 115,000 lots. It has written off $4.8 billion since 2006 as land prices plummeted, but that's less than other builders relative to tangible equity. That means Horton's future write-offs are likely to increase.

Horton is a good operator and runs a very lean company. But right now buyers are concentrated on price. As foreclosure rates stay high and those foreclosed homes come on the market, Horton will have to offer lower prices.

It seems like foreclosures are going to be relatively high for a long time. So even if D.R. Horton doesn't have pricing pressure, it certainly is not going to have pricing power.

In the last quarter the decline in unit volumes was well below our forecast, but we think the company is cutting prices more aggressively to generate sales.

Now, the company should do a good job taking advantage of the demand that's created with the $8,000 tax credit. But right now we tend to favor homebuilders who don't have big land positions because they reload faster with better quality land that has been bought at better prices.

We think Horton will fall to $10.

The Bull: Ken Leon, Standard & Poor's

Housing markets are not strong today, nor do we believe they will be strong for most of 2010, but they are stabilizing. And things are getting better for D.R. Horton.

From March to June it had an uptick in net home orders and sales, and an increased backlog of homes to be built. Its $1.1 billion backlog -- up from $889 million in December -- gives a sense of the revenue it can record for the next six to nine months. That's impressive given that Horton has a lot of exposure to the Sunbelt.

We try to look at early indicators at the homebuilder level. So this is a micro vs. macro. We have seen a significant falloff in the amount of writeoffs taken by Horton for its inventory of land, houses, or even investments and joint ventures. It alone has written off $4.8 billion since 2006. That is easing.

We're hopeful that the $8,000 federal tax credit is not a onetime phenomenon, but rather is a good kick-start that keeps the housing market going into 2010.

Private builders have dominated this industry. Now, as they go bankrupt because banks aren't lending, public builders like Horton are likely to gain share. Next year we expect public builders' market share to be in the low- to mid-30% range, from 25% in 2008.

Those are positive trends and we still think mortgage rates and new home prices are going to be attractive for the next 6-12 months. Our 12-month target price for Horton stock is $14. To top of page

Company Price Change % Change
Bank of America Corp... 16.09 0.08 0.50%
Apple Inc 102.50 0.25 0.24%
Intel Corp 34.92 0.27 0.78%
Facebook Inc 74.82 0.96 1.31%
General Electric Co 25.98 -0.03 -0.12%
Data as of Aug 29
Index Last Change % Change
Dow 17,098.45 18.88 0.11%
Nasdaq 4,580.27 22.58 0.50%
S&P 500 2,003.37 6.63 0.33%
Treasuries 2.34 0.01 0.39%
Data as of 5:37pm ET
More Galleries
8 must-have travel apps Whether you've got wanderlust or an airline grievance, here are some apps to pack onto your phone. More
Hot stocks: 10 record breaking companies The S&P 500 is trading at all-time highs, and many well-known businesses are leading the charge. Time to buy or sell? More
My biggest retirement mistake Five CNNMoney readers share stories about saving that you can learn from. What they would do differently if they had another chance. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.