D.R. Horton, Inc. – Currently Listed as ‘DHI’ on the New York Stock Exchange

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Company Overview

D.R. Horton, Inc. (“DHI”) is a homebuilding company with operations situated within the United States, and whose homebuilding business began several decades ago during the year 1978 in Fort Worth, Texas. DHI’s common stock has been publicly traded since 1992 and as of the latest 10-Q Filing’s date, DHI operated in 109 markets across 33 states and had product offerings include a range of homes for entry-level, move-up, active adult and luxury buyers, with said homes generally ranging in size from 1,000 to more than 4,000 square feet and in price from $200,000 to more than $1,000,000. The Company is organized under the following segments:

  • Homebuilding: This segment primarily designs, builds and sells single-family detached homes on lots developed by DHI and on fully developed lots purchased and already ready for home construction. In an ancillary manner, this segment also builds and sells attached homes, such as townhomes, duplexes and triplexes; and there is also some revenue generated from the sale of land and lots.
  • Forestar: This segment is a residential lot development company with the Company’s homebuilding divisions acquiring finished lots from Forestar in accordance with the master supply agreement between the two businesses.
  • Financial Services: This segment provides mortgage financing and title agency services to homebuyers in many of the Company’s homebuilding markets, with the vast majority of their originated mortgages and related servicing rights being sold to third-party purchasers.
  • Rental: This segment consists of multi-family rental operations engaged in the development, construction, leasing and selling of residential rental properties; and single-family rental operations primarily constructing and leasing single-family homes within a community and then marketing each community for a bulk sale of rental homes.
  • Other: Under this segment the “Company conducts insurance-related operations, owns water rights and other water-related assets, owns non-residential real estate including ranch land and improvements and owns and operates energy-related assets. The results of these operations are immaterial for separate reporting and therefore are grouped together and presented in the Eliminations and Other column in the tables that follow” [3].

DHI’s homebuilding segment is the main segment and revenue generating portion of the Entity as highlighted in the following excerpt from the latest 10-K Filing:

Our homebuilding operations are our core business, generating 95% of our consolidated revenues of $33.5 billion in fiscal 2022, 96% of consolidated revenues of $27.8 billion in fiscal 2021 and 97% of consolidated revenues of $20.3 billion in fiscal 2020. Our homebuilding operations generate most of their revenues from the sale of completed homes and to a lesser extent from the sale of land and lots. [5]

This Security Issue came to our attention at the price of approximately 90.26 at around late-February 2023, with drafting of this Piece beginning soon after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/E ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio
  • The Company’s previous earnings consistency and general increase
  • The Company’s cash dividend payments

Our Suspected Valuation at First Glance: Possibly ‘Gold’ or ‘Silver’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 – 23].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from DHI’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

This Issue has no current assets or liabilities so we cannot comment on their current ratio, performance relative to the acid test, or the long-term debt as a percentage of the net current asset value. We will have some relevant hypothetical commentary pertaining to this down below, however.

The Company has not demonstrated any losses over the last decade, and it is our opinion that the earnings have been fairly consistent. We believe the five- and 10-year averages can be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers. That being said however, the last two financial years have visibly altered the averages so this may be worth consideration for those using such averages.

The Company has an uninterrupted annual dividends streak going back to 2014.

The Company’s most recent annual earnings were larger than those of six years prior; and looking at the three-year averages of our diluted EPS (beginning 2014) we can see that over the latest fiscal decade, the EPS have increase by approximately 588%.

The discernible tangible equity per share is 39.88 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be 21.42, 13.46 and 3.01, respectively. The current price of 92.78 is greater than 120% of all of these values.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were five main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following five points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Consolidation and Acquisitions

DHI’s basis of presentation means all wholly-owned and majority-owned, controlled subsidiaries are represented in the consolidated financials, the main observable non-wholly-owned entity being Forestar Group Inc. (“Forestar”). As of December 31, 2022, DHI owned a 63% controlling interest in Forestar and therefore consolidated 100% of Forestar within its consolidated financial statements, with the remaining 37% interest being accounted for as noncontrolling interests. At the time the Company acquired 75% of the outstanding shares of Forestar but this percentage has come down due to stock issuance we will mention later. For now, please see the extract from the relevant 10-K Filing at the time:

On October 5, 2017, we acquired 75% of the outstanding shares of Forestar for $558.3 million in cash, pursuant to the terms of the June 2017 merger agreement. Forestar is a publicly traded residential lot development company listed on the New York Stock Exchange under the ticker symbol “FOR,” with operations in 24 markets and 14 states as of September 30, 2018. The transaction costs incurred by us related to this acquisition totaled $7.2 million, of which $5.3 million was incurred during fiscal 2018 and expensed to homebuilding selling, general and administrative expense. [13]

At the time this was a considerable acquisition but it did not make up a concerning share of the Company’s assets and as shown in the table below, the assets of this consolidation still do not constitute such:

All of this to say, in the event of a liquidation or even for the sake of accurately calculating which DHI assets purchases of this Security Issue are entitled to, we don’t believe the portion allocated to the non-controlling interest would cause such a notable disparity per share from what we have calculated. That being said, if anybody wishes to use the table above and deduct 37% of Forestar’s assets to maybe get a more accurate feel, we understand. We have not opted to do that in this instance as Forestar’s assets did not make up such a large percentage of DHI’s total assets but we would perhaps encourage it for the more meticulously curious amongst you. The Company also occasionally has variable interest (consolidated or unconsolidated) to be aware of, but in the latest 10-Q Filing there were none mentioned so we’ve not accounted for anything of the sort in this subsection.

Whilst on the matter of consolidation we’ll mention that the Company is not averse to acquiring smaller companies, and Forestar was not a one-off. The other acquisitions however are usually wholly-owned and a list of their references in the latest 10-K Filings is as follows:

  • “In September 2016, the Company acquired the homebuilding operations of Wilson Parker Homes for $91.9 million. Wilson Parker Homes operated in Atlanta and Augusta, Georgia; Raleigh, North Carolina; Columbia, South Carolina and Phoenix, Arizona. The assets acquired included approximately 380 homes in inventory, 490 lots and control of approximately 1,850 additional lots through option contracts. The Company also acquired a sales order backlog of 308 homes. No goodwill was recorded as a result of this acquisition” [13].
  • “In June 2018, we acquired the assets of Permian Homes, which included a $44.2 million sales order backlog of 159 homes. Permian Homes operates in Midland and Odessa, Texas. This asset purchase was not material to our results of operations or our financial condition” [13].
  • “During fiscal 2019, we acquired the homebuilding operations of Westport Homes, Classic Builders and Terramor Homes for $325.9 million. The assets acquired included approximately 700 homes in inventory, 4,500 lots and control of approximately 4,300 additional lots through land purchase contracts. We also acquired a sales order backlog of approximately 700 homes” [11].
  • “In October 2020, we acquired the homebuilding operations of Braselton Homes in Corpus Christi, Texas for approximately $23.0 million in cash. The assets acquired included approximately 90 homes in inventory, 95 lots and control of approximately 840 additional lots through purchase contracts. We also acquired a sales order backlog of approximately 125 homes” [7].
  • “In April 2022, the Company and Vidler Water Resources, Inc. (Vidler) entered into a definitive merger agreement pursuant to which the Company would acquire all of the outstanding shares of Vidler for $15.75 per share in an all-cash transaction. Under the terms of the merger agreement, in May 2022, the Company completed a tender offer and acquired all of the outstanding shares for a total purchase price of $290.5 million. There was no goodwill recorded as a result of this transaction” [5].
  • “In December 2022, the Company acquired the homebuilding operations of Riggins Custom Homes in Northwest Arkansas for approximately $107 million in cash. The assets acquired included approximately 170 homes in inventory, 3,000 lots and a sales order backlog of approximately 100 homes. The Company expects to complete the purchase price allocation in the second quarter of fiscal 2023 and does not expect to record any goodwill associated with this acquisition” [3].

DHI has not specified how these acquisitions were funded, i.e., from cash on hand or the proceeds of loans/debt issuance, so that we cannot comment on. Positively though, we can say the following: i) Either no goodwill was recorded (as mentioned in quotes above themselves) or the goodwill acquired (from our analysis) was not a large percentage of the assets purchased; ii) There was no equity dilution/common share issuance as a consideration of these purchases; and iii) The operations of the Company were not orthogonal to DHI’s but were aligned with what was already happening. As an additional point of commentary, we don’t suspect the Company is reliant upon this strategy for their growth so overall it is not a trend we here take any particular issue with, although we would find it useful if the Company included an organic net sales reconciliation (like that included by Central Garden & Pet Company). A final and relevant point we will add here is that in spite of the acquisition tendency, we do not think the company engages in corporate pyramiding.

Inventory and Land Option Charges

There was a particular type of recurring charge noticeable in every 10-K Filing, i.e., those of this subsection’s eponymous title. Directly below is a table showing the amounts these charges totalled each fiscal year over the last 10 years:

The charges seem like an inevitable by-product of the Company’s operations and ultimately we don’t have too much to comment on these charges and although they erode Shareholder’s income, they are at least consistent and thus items to perhaps easily predict and accept, in a xenial or other fashion. If you would like more details then we suggest searching the latest 10-K Filings for the phrases ‘Inventory and Land Option Charges’ and ‘Note C – Inventories’. Directly below is a list of other charges that caught our attention although in the grand scheme of things these are likely farthings:

  • “We perform our annual goodwill impairment evaluation in the fourth quarter of each fiscal year…As a result of the 2016 evaluation, a $7.2 million impairment charge was recorded to reduce the goodwill in the Huntsville operating segment in our Southeast reporting region” [13].
  • “Selling, general and administrative (SG&A) expense for fiscal 2018 includes $6.3 million of severance and change of control charges for Forestar’s executive officers that were triggered shortly after the acquisition date. The severance and change of control amount of $2.6 million was payable to Forestar’s former Chief Executive Officer upon his resignation from Forestar on December 28, 2017. The remaining severance and change of control amounts are payable upon termination or resignation of each of the executives. SG&A expense also includes charges of $0.9 million related to the shared services agreement between Forestar and D.R. Horton whereby D.R. Horton provides Forestar with certain administrative, compliance, operational and procurement services” [13].
  • “SG&A expense for fiscal 2019 and 2018 includes charges of $2.1 million and $0.9 million, respectively, related to the shared services agreement between Forestar and D.R. Horton whereby D.R. Horton provides Forestar with certain administrative, compliance, operational and procurement services. SG&A expense for fiscal 2018 also includes $6.3 million of severance and change of control charges for Forestar’s executive officers that were triggered shortly after the acquisition date” [11].
  • “SG&A expense for fiscal 2020 and 2019 includes charges of $5.0 million and $2.1 million, respectively, related to the shared services agreement between Forestar and D.R. Horton whereby D.R. Horton provides Forestar with certain administrative, compliance, operational and procurement services” [9].
  • “Forestar recognized an $18.1 million loss on extinguishment of debt upon redemption of the notes” [7].

Note’s Investment Merit

This Company has issued a lot of investible debt and as usual we have decided to look at the fixed charge coverage which is shown in Table 4 – 3 directly below:

The fixed charge coverage is sufficient as per Chapter 11 of The Intelligent Investor [2], so this is a pass. Please also see the following relevant bullet points:

  • The notes are unsecured.
  • “All series of homebuilding senior notes and borrowings under the homebuilding revolving credit facility are senior obligations and rank pari passu in right of payment to all existing and future unsecured indebtedness and senior to all existing and future indebtedness expressly subordinated to them” [5, 7, 9, 11].
  • The Company is not averse to repaying the notes before their maturity dates seemingly even if it results in a loss on the extinguishment of debt.
  • We are not aware of any outside entity’s guarantees and have not seen any mention of a sinking fund but those interested in this should review the prospectuses of the relevant notes payable.

Depreciation Charges

The Company has failed to clarify in the 10-K Filings where the depreciation charges are accounted for as far as the income statement is concerned. In this instance however, the consolidated statements of cash flows reveal depreciation charges two magnitude orders smaller than the net income so even if they were not accounted for, the difference to the income would likely be minimal and possibly negligible even with reference to our valuations. That being said we do believe DHI should lucidly describe exactly where on the income statement these charges have been considered going forward. Concerning the amortization however, DHI states “the amortization of capitalized interest and property taxes is allocated to each homebuilding segment based on the segment’s cost of sales” [5, 7, 9, 11, 13], leading us to suspect that all ‘amortization’ is situated within the cost of sales but no such clarification has been provided for depreciation anywhere, hence us being reserved about these charges. As far as the depreciation methodology goes, the Company has said:

Depreciation generally is recorded using the straight-line method over the estimated useful life of the asset. The depreciable life of model home furniture is 2 years, depreciable lives of other furniture and equipment typically range from 2 to 5 years, and depreciable lives of buildings and improvements typically range from 5 to 30 years. [5, 7, 9]

The estimated useful lives of the assets have been consistent over the years with the exception of ‘buildings and improvements’, which was 5-30 years from the 2017 10-K Filing, prior to which it was 5-20 years. We believe concise values should be provided as opposed to ranges and also believe the upper end of the range for buildings is low.

Stock Screener Flaw

Like our ALOT, SCVL, and RS Pieces, the results yielded from our stock screener criterion exposed a floor in their mechanics, but of a different nature to the aforementioned Security Issues. This time it was concerning the current assets, of which our filter returned a value in excess of 6.5, something which upon reviewing the consolidated financial statements of the Issue ourselves turned out to be impossible as the Company has no listed current assets or current liabilities. However, for experimental purposes we can make use of the assets listed which could fall into the ‘current’ classification, and utilize some liabilities (as a hypothetical worst-case scenario) to artificially manufacture theoretical current assets and liabilities on behalf of DHI. Please see Table 4 – 4, and Table 4 – 5 below:

Using the Tables 4 – 4, and 4 – 5 above, we can now comment on the first two points we typically do in Section 3, but were here unable to:

  • The Issue’s current ratio is 6.31 in accordance with Table 4 – 4, and Table 4 – 5 above. The best, average and worst-case scenarios are 4.91, 4.43 and 3.50 respectively, all of which are above the minimum recommended figure of 1.5. The Issue fails the acid test in all four instances.
  • The long-term debt value does not exceed 110% of the net current asset value in any of the four scenarios.

Of course, this is not a GAAP way of doing things but just a quick method to perhaps reconcile on given criteria where possible.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. The Company may have just recently completed a business cycle expansion.
  2. The Company is fairly capitalized so may not make for much of an interesting speculative purchase in this regard.
  3. The Company does not consistently provide any predictions for the following year, say for what they anticipate the capital expenditures to be and so we cannot comment on their prediction’s reliability as we would like to.
  4. The last instance of insider buying was in 2014 and since then there have been 126 instances of selling [26].
  5. The Company has an active share repurchase plan in place under which the repurchased shares are held as treasury stock. We are unsure why they are held and what DHI’s plans are with them.
  6. The Company no longer references comprehensive income, presumably as they have no adjustments to consider e.g., currency translations.
  7. In this instance the inventories are comprised of land and real estate so there is no mention of ‘Last-in First-out (LIFO)’ or ‘First In, First Out (FIFO)’ etc., although it is not clear who appraises the value of the Company’s claimed inventory values (a matter possibly more significant with this company). And whilst we are on this matter it is perhaps worth considering that a lot of the inventories are level 3, fair value measurements.
  8. The effective tax rates have recently been a lot closer to official corporate rates since these were lowered and prior to that they were often marginally higher by varying degrees. Concerning carryforwards etc. the latest 10-K Filing from DHI stated the following:
    1. “Our deferred tax assets, net of deferred tax liabilities, were $159.0 million at September 30, 2022 compared to $159.5 million at September 30, 2021. We have a valuation allowance of $17.9 million and $4.2 million at September 30, 2022 and 2021, respectively, related to deferred tax assets for state net operating loss (NOL), state capital loss and tax credit carryforwards that are expected to expire before being realized. Of the $17.9 million valuation allowance, $15.8 million relates to state NOL, state capital loss and tax credit carryforwards acquired in the Vidler acquisition” [5].
    2. “We have $30.9 million of tax benefits for a federal NOL carryforward acquired in the Vidler acquisition. The utilization of the federal NOL is subject to IRC Section 382 limitations; however, it is expected that all of the federal NOL will be utilized within the carryforward period. D.R. Horton has $12.0 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction. Of the total amount, $4.3 million of the tax benefits expire over the next ten years and the remaining $7.7 million expire from fiscal years 2033 to 2042. Forestar has $1.2 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction” [5].
  9. We did not note any large or concerning payments due in a year or so.
  10. There have been no concerning recent declines in the value of the assets in recent years.
  11. The Company is a “large accelerated filer” in Rule 12b-2 of the Exchange Act and has consistently been so throughout our sampled 10-K Filings.
  12. For the last four 10-K Filings, the critical audit matter has repeatedly been reported as “estimation of reserves for construction defect matters” [5, 7, 9, 11].
  13. The Company mentions “Reclassifications” in most 10-K Filings.
  14. DHI’s 10-Ks have reiterated that the ‘other income/expense’ line on their income statement “consists of interest income and various other types of ancillary income, gains, expenses and losses not directly associated with sales of homes, land and lots. The activities that result in this ancillary income are not significant, either individually or in the aggregate” [5, 7]. That being said, we’d think more elaboration would be more useful and exact figures should be put to each detailed component.
  15. The Company has referenced previous cybersecurity incidents but have not elaborated on the details much, only saying they “have not had a material effect on our business or operations to date” [5]. Further elaboration should maybe be sought, and dependent upon the nature of these incidents this could subjectively be viewed in a negative light.

Points we feel may be considered negative

  1. The Company lost money in the years pertaining to the economic downturn of 2008-2009 [25].
  2. There is a history of many stock splits [27] and much observed equity dilution. Please see the following examples:
    1. “During April and May of 2014, the Company’s outstanding 2% convertible senior notes were converted into 38.6 million shares of the Company’s common stock. The conversion rate was 77.18004 shares of the Company’s common stock per $1,000 principal amount of senior notes, which was equivalent to a conversion price of approximately $12.96 per share of common stock” [21].
    2. “On September 30, 2019, Forestar issued 6.0 million shares of its common stock for $17.50 per share in a public underwritten offering. Net proceeds to Forestar from this offering after deducting underwriting discounts and commissions and other expenses were $100.7 million. As a result of the issuance, our ownership of Forestar’s outstanding common shares decreased from 75% to approximately 66%. Following the offering, $394.3 million remains available for issuance under Forestar’s shelf registration statement” [11].
    3. “During fiscal 2021, Forestar issued 1.4 million shares of common stock under its at-the-market equity offering program for proceeds of $33.4 million, net of commissions and other issuance costs. At September 30, 2021, $359.9 million remained available for issuance under Forestar’s shelf registration statement, of which $65.6 million was reserved for sales under its at-the-market equity offering program. In October 2021, after the expiration of Forestar’s existing registration statement and at-the-market equity offering program, a new shelf registration statement became effective, registering $750 million of equity securities” [7].
    4. “Forestar has an effective shelf registration statement, filed with the SEC in October 2021, registering $750 million of equity securities, of which $300 million was reserved for sales under its at-the-market equity offering program that became effective in November 2021. During fiscal 2022, Forestar issued 84,547 shares of common stock under its at-the-market equity offering program for proceeds of $1.7 million, net of commissions and other issuance costs totaling $0.1 million” [5].
  3. There are a very large number of shares authorized allowing much room for further potential equity dilution.
  4. A very large percentage of the common shares outstanding are owned by institutions (91.82% at the time of writing [28]).
  5. There have been an equal number of year-over-year increases in cash and cash equivalents as there have been decreases over the last decade, but four out of the five increases were largely owed to loan proceeds.
  6. The Company makes use of hedging/derivative instruments.
  7. The Business has ostensibly elaborated on a number of legal proceedings and constantly emphasises their involvement in many lawsuits every year, recently saying they have determined they’ll disclose such proceedings if they reasonably believe such proceedings will result in monetary sanctions, exclusive of interest and costs, at or in excess of $1 million. Please see the following elaborations on matters, with the last one showcasing the scope of their potential legal proceedings:
    1. The Company has been subpoenaed by the United States Department of Justice (DOJ) regarding the adequacy of certain underwriting and quality control processes related to Federal Housing Administration loans originated and sold.
    2. The Company received Notices of Violation from the United States Environmental Protection Agency related to stormwater compliance at certain sites in our Southeast region, part of which they later settled on paying a penalty of $267,000 without an admission of liability.
    3. The Company was participating in settlement discussions with the U.S. Army Corps of Engineers (ACOE) and DOJ concerning alleged violations of the wetlands provisions of the Clean Water Act at a development site in their Southeast region relating to a violation notice the ACOE issued in April 2017. They last said that this “could potentially result in a settlement that includes a penalty of approximately $350,000 without an admission of liability” [9, 11].
    4. “Our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. At September 30, 2022 and 2021, we had reserves for approximately 560 and 380 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During fiscal 2022, we were notified of approximately 355 new construction defect claims and resolved 175 construction defect claims for a total cost of $24.4 million” [5].
  8. There have been a lot of related party transactions, here we shall list the most recent:
    1. DHI “has a strategic relationship with Ryan Horton and Reagan Horton and entities controlled by them (collectively, referred to herein as ‘R&R’) where R&R has served as a land seller and a land banker to the Company. Ryan and Reagan Horton are the adult sons of Donald R. Horton, the Company’s Executive Chairman, and Martha Elizabeth Horton. Donald R. Horton and Martha Elizabeth Horton are referred to herein as the ‘Hortons.’” [4, 6] There are millions worth of related party transactions between DHI and R&R detailed in every definitive proxy statement.
    2. “Construction Services. David V. Auld, the Company’s CEO, entered into a construction services contract with the Company to build a pool house at his residence. The cost of the project was $265,000. The transaction complied with the Company’s Related Party Transaction Policy” [6].
    3. “Construction Services. Reagan Horton, the son of Mr. Horton, received construction services from the Company. The cost paid by Reagan Horton to the Company was $315,000. The transaction complied with the Company’s Related Party Transaction Policy” [6].
    4. “ John Auld, adult son of David V. Auld, the Company’s Chief Executive Officer, is employed by the Company as a Division President at the Orlando East Division. In fiscal 2022, John Auld earned cash compensation of $1,760,219 and equity compensation valued at $212,753. His compensation is consistent with the compensation provided to other employees of the same level with similar responsibilities. John Auld’s employment complied with the Company’s Related Party Transaction Policy” [4].
    5. “ Laura Brown, sister of Michael J. Murray, the Company’s Co-Chief Operating Officer, is employed by the Company at its Corporate office. In fiscal 2022, Laura Brown earned cash compensation of $119,391 and equity compensation valued at $73,904. Her compensation is consistent with the compensation provided to other employees of the same level with similar responsibilities. Laura Brown’s employment complied with the Company’s Related Party Transaction Policy” [4].
  9. Management observations:
    1. The Company makes use of several non-GAAP metrics when accounting for NEO compensation, including TSR.
    2. The CEO pay ratio has been going up consistently and has been in excess of 250 for the last two DEF 14A Forms.
    3. Regarding the ‘inventive bonus plan’ the Company went from saying “compensation expense related to these plans was $9.8 million, $4.9 million and $0.5 million in fiscal 2013, 2012 and 2011, respectively” [23], to “compensation expense related to these plans was $40.5 million, $61.6 million and $34.3 million in fiscal 2022, 2021 and 2020, respectively” [5], a notable increase.
    4. The totality of the Director compensation is relatively large compared to other Issues we have looked at.
    5. Several DEF 14As out of the last 10+ have detailed delinquent Section 16(a) Reports.
    6. The Board adopted a retirement policy for Directors under which they may not stand for re-election after they have reached the age of 75, but this has been waived for several Directors.
    7. The Board seems small considering the size of the Company, with the 2023 DEF 14A Form stating the “Board is composed of five independent directors and one management director” [4]. This has also resulted in a fair amount of committee member overlap.
    8. The Company’s Executive Committee is composed of one individual.
    9. There have been a lot of named parties linked to PricewaterhouseCoopers LLP (“PwC”), the previous independent auditors.

Points we feel may be considered positive

  1. We would say the operations of the Company are easy for the layman to understand.
  2. The Company’s homebuilding business began in 1978, thus has stood the test of time.
  3. There is no risk concentration concerning customers or suppliers. The only perceivable risk concentration some may have is the following, which we do not deem too much of a concern – “During fiscal 2022, approximately 62% of our mortgage loans were sold directly to Fannie Mae, Freddie Mac or into securities backed by Ginnie Mae, and 30% were sold to one other major financial entity” [5].
  4. This is a rather large company in terms of consolidated financials, rendering it one of “adequate size” [2].
  5. The Company’s founder Donald R. Horton is Chairman of the board so there is the extra vested interest and proximity, however they do not control enough shares to sway voting matters should it possibly be necessary.

Possible Questions for DHI’s Approximate 274 Stockholders to Consider, Investigate and/or Raise with Management

  1. Who appraises the land and real estate that the Company lists on their balance sheet as inventories? And if it is not an unrelated third-party, why is this the case?
  2. Why are so many inventories level 3, fair value measurements? Are there truly no similar markets for these assets?
  3. Every year the Company transfers millions worth of assets to the level 3 fair asset valuation measurement “due to significant unobservable inputs used in determining the fair value of these loans” [5, 7, 9, 11, 13, 15]. At this point is there not enough relevant predictability and enough documented history that the Company should have known to place them there to begin with?
  4. The 10-K Filings reiterate that “other income consists of interest income and various other types of ancillary income, gains, expenses and losses not directly associated with sales of homes, land and lots. The activities that result in this ancillary income are not significant, either individually or in the aggregate” [5, 7]. Can this be elaborated on, and can numbers be put to each description?
  5. The Company previously used to report selling some of their debt securities to a third party, typically for a gain. Why did this stop? Was it not in the Company’s best fiscal interest?
  6. The Company no longer references ‘comprehensive income’, is this because it would be the exact same value as the ‘net income’?
  7. The Company’s long-term debt has constantly increased in recent years. At what point is it expected to stop and regress or is that not something Management are concerned with?
  8. Can exact estimated useful lifetimes of the fixed assets be provided as opposed to ranges?
  9. Why did the estimated useful lifetime of ‘buildings and improvements’ change from 5-20 years, to 5-30 years from the 2017 10-K Filing onwards? And is this useful lifetime range not still a little short as it does not extend to say 40 or 50 years?
  10. The Company mentions “reclassifications” in most 10-K Filings, is that not a bit excessive?
  11. Why did the Company recently remove the table under ‘contractual cash obligations, commercial commitments and off-balance sheet arrangements’ header which outlined their upcoming payment obligations?
  12. Why did the Company remove the region in the 10-K Filings addressing the off-balance sheet arrangements?
  13. The Company has referenced previous cybersecurity incidents but have not elaborated on the details much, only saying they “have not had a material effect on our business or operations to date” [5]. Can more details be provided?
  14. Why have such a large number of shares been authorized and can any reassurance be provided that these will not dilute Shareholder equity in the near-term future?
  15. What are the Company’s intentions with the treasury stock and why are they not retired?
  16. The number of holders of record was 492 in fiscal 2012 but it was reported to be 274 in fiscal 2022 (FYI it was even higher in the years prior to fiscal 2012). Why do Management believe the number has dipped?
  17. The Company has mentioned seeking active engagement from investors including several of the Company’s “largest stockholders”. How does the Company decide which Shareholders to engage communications with and how would the smallest shareholders be contacted or are they not considered and if not, why not?
  18. Are all terms of the related party transactions negotiated at an arms-length basis?
  19. How does the Company plan to keep control of future delinquent Section 16(a) Reports as a few have been detailed in the last decade’s worth of DEF 14A Forms?
  20. Does the Board not think it is in everybody’s best interest for it to expand in size and enlist more Directors for more a diversified thought processes?
  21. Why did the Company dismiss their previous independent registered public accounting firm PricewaterhouseCoopers LLP (“PwC”) and instead engage with Ernst & Young LLP (“EY”)?
  22. Why did the Board go from using the services of Equilar to those of Meridian Compensation Partners for ascertaining NEO compensation?
  23. Why is the Executive Committee composed of only one individual?

 

Valuations

The price of this Security Issue at the time of this Piece’s publication is 92.78. Using our most recent three-year average of the diluted EPS (10.02) as opposed to the most recent EPS figure (14.20) increased the P/E ratio from 6.54 to 9.26; and using our discernible tangible equity value per share (39.88) as opposed to the stated book value per share (49.81, in accordance with Table 2 – 2) has increased the P/BV ratio from 1.86 to 2.33. With that in mind and considering current federal interest rates (4.75% at the time of writing), the current price does appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

Taking our most recent three-year average value of 10.02 for diluted EPS and our stated discernible tangible equity value per share of 39.88, and multiplying the corresponding P/E and P/BV ratios of 9.26 and 2.33 respectively, we get a figure of 21.53, which is below Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 94.84.

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering our adjustments:

  • The Company’s low P/E ratio – still valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – still valid
  • The Company’s current ratio – no longer valid
  • The Company’s previous earnings consistency and general increase – still valid
  • The Company’s cash dividend payments – still valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently undervalued on account of its current and previous quantitative showing. We also believe this Security Issue demonstrates the possible flaws in only using numerical metrics and ratios when search for suitable investments, especially from 3rd party screeners.

Our Valuation: Bronze

This Issue performed reasonably well concerning our ‘Initial Discussions Regarding the Company’s Financials’ section where applicable, and then in the missing elements which we re-visited in Section 4. Overall, there were no major off-putting qualitative facets although there are a few points to keep an eye on in the negative section going forward, such as the equity dilution, stock splits and related party transactions. For this Security Issue to have achieved the next highest valuation of ‘Silver’ it would likely have had to come in at a pricing point of approximately 70 – 80.

At this point in time and all matters here considered, this is a stock pick we would likely follow and would give some consideration towards adding to a stock portfolio given the correct price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. DHI’s 1st 2023 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/882184/000088218423000015/dhi-20221231.htm
  4. DHI’s 2023 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000119312522303898/d399328ddef14a.htm
  5. DHI’s 2022 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218422000184/dhi-20220930.htm
  6. DHI’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000088218421000238/dhiproxydoc-2022meeting.htm
  7. DHI’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218421000190/dhi-20210930.htm
  8. DHI’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000088218420000173/proxydoc-2021meeting.htm
  9. DHI’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218420000143/dhi-20200930.htm
  10. DHI’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000119312519319220/d844232ddef14a.htm
  11. DHI’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218419000147/a2019930-10k.htm
  12. DHI’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000119312518350016/d427542ddef14a.htm
  13. DHI’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218418000120/a2018930-10k.htm
  14. DHI’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000119312517370537/d436439ddef14a.htm
  15. DHI’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218417000103/a2017930-10k.htm
  16. DHI’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000119312516789486/d299129ddef14a.htm
  17. DHI’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218416000203/a2016930-10k.htm
  18. DHI’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000119312515400363/d96547ddef14a.htm
  19. DHI’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218415000085/a2015930-10k.htm
  20. DHI’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000119312514445557/d829446ddef14a.htm
  21. DHI’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218414000097/a2014930-10k.htm
  22. DHI’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000119312513479302/d639066ddef14a.htm
  23. DHI’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218413000084/a2013930-10k.htm
  24. DHI’s 2013 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/882184/000119312512510149/d453736ddef14a.htm
  25. DHI’s 2012 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/882184/000088218412000065/a2012930-10k.htm
  26. https://www.gurufocus.com/stock/DHI/insider
  27. https://www.stocksplithistory.com/?symbol=dhi
  28. https://www.gurufocus.com/stock/DHI/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K Filing/Annual Report which represents the financial year ended that same year, typically in the calendar month of September, i.e., any mention of the ‘2019 10-K Filing’ or ‘2019 Annual Report’ etc. refers to the 10-K Filing representing the fiscal year ended September 2019. The Filings are usually published a couple of months later, that same calendar year.

Throughout this Piece, any mention of a given year’s Proxy Statement refers to the DEF 14A Form/Proxy Statement which accompanied the most recent 10-K Filing, i.e., any mention of the ‘2020 Proxy Statement’ refers to the DEF 14A Form which accompanied the 2019 10-K Filing; usually published not too soon after the 10-K Filing (typically the following calendar month relative to the 10-K Filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V