D.R. Horton (DHI)

Homebuilder (NYSE:DHI) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 15.1% year on year to $7.73 billion. The company’s full-year revenue guidance of $34.05 billion at the midpoint came in 5.8% below analysts’ estimates. Its GAAP profit of $2.58 per share was 2.5% below analysts’ consensus estimates.

Company Overview

One of the largest homebuilding companies in the U.S., D.R. Horton (NYSE:DHI) builds a variety of new construction homes across multiple markets.

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Other homebuilders operating in D.R. Horton’s market include Lennary (NYSE:LEN), PulteGroup (NYSE:PHM), and NVR (NYSE:NVR).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, D.R. Horton grew its sales at an exceptional 13.8% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. D.R. Horton’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 2.4% over the last two years was well below its five-year trend.

We can dig further into the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. D.R. Horton’s backlog reached $5.5 billion in the latest quarter and averaged 19.4% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company hasn’t secured enough new orders to maintain its growth rate in the future.

This quarter, D.R. Horton missed Wall Street’s estimates and reported a rather uninspiring 15.1% year-on-year revenue decline, generating $7.73 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 3.9% over the next 12 months, similar to its two-year rate. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.

D.R. Horton has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 26.1% gross margin over the last five years. Said differently, D.R. Horton had to pay a chunky $73.90 to its suppliers for every $100 in revenue.

D.R. Horton’s gross profit margin came in at 24.6% this quarter, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

D.R. Horton has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 17.9%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, D.R. Horton’s operating margin decreased by 1.5 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, D.R. Horton generated an operating profit margin of 12.9%, down 3 percentage points year on year. Since D.R. Horton’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

D.R. Horton’s EPS grew at an astounding 21.1% compounded annual growth rate over the last five years, higher than its 13.8% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

Diving into D.R. Horton’s quality of earnings can give us a better understanding of its performance. A five-year view shows that D.R. Horton has repurchased its stock, shrinking its share count by 15.2%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For D.R. Horton, its two-year annual EPS declines of 5.6% mark a reversal from its (seemingly) healthy five-year trend. We hope D.R. Horton can return to earnings growth in the future.

In Q1, D.R. Horton reported EPS at $2.58, down from $3.52 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects D.R. Horton’s full-year EPS of $13.22 to shrink by 1.9%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

D.R. Horton has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.6%, subpar for an industrials business. The divergence from its good operating margin stems from its capital-intensive business model, which requires D.R. Horton to make large cash investments in working capital and capital expenditures.

Taking a step back, an encouraging sign is that D.R. Horton’s margin expanded by 1.4 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

D.R. Horton burned through $470.5 million of cash in Q1, equivalent to a negative 6.1% margin. The company’s cash burn increased from $340.4 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although D.R. Horton hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 22.8%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, D.R. Horton’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

D.R. Horton reported $2.47 billion of cash and $6.52 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $5.47 billion of EBITDA over the last 12 months, we view D.R. Horton’s 0.7× net-debt-to-EBITDA ratio as safe. We also see its $46.7 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its revenue and EPS both fell short of Wall Street’s estimates. Additionally, D.R. Horton lowered its full-year revenue guidance, missing Wall Street estimates significantly. Overall, this quarter could have been better. The stock traded down 3.1% to $114 immediately after reporting.

Updated: June 19, 2025 at 11:52 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in D.R. Horton.

D.R. Horton isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s impressive operating margins show it has a highly efficient business model, the downside is its projected EPS for the next year is lacking.

D.R. Horton’s P/E ratio based on the next 12 months is 9.4x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $144.50 on the company (compared to the current share price of $121.28).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.