Horton's Housing Is Hot
About two months ago, when the Street began bailing out of housing stocks, Peter Zuleba III, senior portfolio manager at Glenmede Trust, began snapping up shares of D.R. Horton (DHI ), the nation's No. 1 homebuilder. Investing in construction, he says, could be "stomach-crunching" for a while -- already the stock has dropped from 43 in July to 38 on Dec. 14. But Zuleba thinks Horton is the best of the lot and the likeliest to continue performing well despite declining demand and rising interest rates. That's because Horton, specializing in entry-level single-family houses in 21 states, has "the best management in the industry" and has posted increased earnings each year since 1995, he says. The market is underestimating the long-term growth potential and operating improvements that management has put in place. To drive up margins, Horton has held down its material and labor costs, argues Zuleba. Scale and capital, he adds, give Horton a big advantage in buying land, building new houses, and opening new communities. He expects the stock to hit 45 in a year. The stock's depressed price, combined with a "solid earnings outlook," should give investors a strong return over the next year, says Stephen East of Susquehanna Financial Group. He sees a moderate housing slowdown, especially since the Federal Reserve signaled it may soon end further rate increases when it raised rates on Dec. 13. Solid growth will continue in 2006, forecasts East, who expects earnings of $5.99 a share on sales of $16.7 billion in fiscal 2006 and $6.61 on sales of $19.6 billion in 2007, up from 2005's $4.62 on $13.9 billion. At six times 2006 earnings, the stock is reasonably cheap, says East.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial