Did you miss the homebuilder rally last year? It's not too late. DR Horton Inc. (DHI - Analyst Report) is a Zacks Rank #1 (Strong Buy) that is expected to grow earnings by 30% in 2013.
DR Horton is one of the largest homebuilders in the United States with operations in 77 markets in 26 states. Its homes are priced from $100,000 to $600,000.
The housing market has been recovering in 2013 but having been burned during the peak of the boom, the homebuilders have been more conservative about rolling out new product.
At the end of Fiscal 2012, DR Horton's backlog had risen 49.2%.
Low Inventory Equals Higher Prices
Interestingly, DR Horton finds itself in competition not so much with other homebuilders but with existing home sellers. That's where the good news comes in. Inventories of existing homes have been plummeting the last few months.
For instance, Las Vegas saw inventories fall 24% in March year over year. If you count only the houses that are NOT already under contract, the existing home inventory actually plunged 42% to less than a month's supply.
When there is less than 6-month inventory, that means it is a sellers market. With just 1-month worth of inventory, that puts it in an extreme sellers market.
In a sellers market, buyers are faced with limited options so they will turn to new construction. That's good news for DR Horton. Increased demand but limited inventory means it can raise prices.
Earnings On The Rise
The analysts are even more bullish on DR Horton now than 3 months ago as the Zacks Consensus for fiscal 2013 has jumped to $1.01 from 88 cents in that time.
That is earnings growth of 30% over 2012.
2014 is still seen as equally bullish with another 42% earnings growth expected.
But What About Valuations?
There has been a lot of complaining that the homebuilder stocks have gotten ahead of themselves and are now overvalued. But that's simply not the reality.
DR Horton has a forward P/E of 23.1 which is slightly higher than its peers which average a P/E of 21.6.
Historically, DR Horton traded as high as 26x in 2007, just before the crash. In 2011, when the company struggled to find earnings, it traded as high as 97x. Even last year, as the housing market picked up, its forward P/E was as high as 29.
Compared to its recent history, DR Horton's valuation isn't excessive. The rising earnings estimate is also keeping its P/E in check.
It's not too late to make money in the homebuilders. Many are still expected to see big earnings growth this year.
DR Horton is a company that should be front and center for those looking for a way to play the improving housing market.
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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.