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12-10-2023, 08:10 AM
DHI has been the largest homebuilder by volume in the United States since 2002 and has closed more than 1,000,000 homes in its 45-year history.
The company was in the spotlight recently because Warrant Buffet started buying into it in Aug. But my analysis did not point to any margin of safety. So am I missing something?
Despite its size and geographic spread, DHI had not been able to improve its gross profitability over the cycle. I would also rate its financial position as average.
From 2005 to 2022, its revenue grew at a CAGR of 5 %. During this period there was a strong correlation between its revenue and Housing Starts.
Housing Starts are cyclical. But over the past 70 years, there was no growth in the long-term annual average Housing Starts. As such, you should view DHI as a cyclical company, but with a small growth path.
![[Image: DR-Horton-2023.png]](https://i.postimg.cc/4NmWCQ0p/DR-Horton-2023.png)
My valuation of DHI on such a basis showed that I could not get a 30 % margin of safety even with various ways to calculate the gross profit margins. This is based on the view that there is no growth in the long-term annual average Housing Starts.
Even if I assumed that there is a 1/3 increase in the long-term annual average Housing Starts, the margin of safety is still lower than my 30% cut-off.
Warren Buffett is also a long-term investor and definitely understand that this is a cyclical company. So where am I wrong?
The company was in the spotlight recently because Warrant Buffet started buying into it in Aug. But my analysis did not point to any margin of safety. So am I missing something?
Despite its size and geographic spread, DHI had not been able to improve its gross profitability over the cycle. I would also rate its financial position as average.
From 2005 to 2022, its revenue grew at a CAGR of 5 %. During this period there was a strong correlation between its revenue and Housing Starts.
Housing Starts are cyclical. But over the past 70 years, there was no growth in the long-term annual average Housing Starts. As such, you should view DHI as a cyclical company, but with a small growth path.
My valuation of DHI on such a basis showed that I could not get a 30 % margin of safety even with various ways to calculate the gross profit margins. This is based on the view that there is no growth in the long-term annual average Housing Starts.
Even if I assumed that there is a 1/3 increase in the long-term annual average Housing Starts, the margin of safety is still lower than my 30% cut-off.
Warren Buffett is also a long-term investor and definitely understand that this is a cyclical company. So where am I wrong?