JOHN BUCKINGHAM
CHIEF PORTFOLIO MANAGER
AL FRANK FUND

COMPANY: D.R. Horton
TICKER: DHI (NYSE)
PRICE: $36.69 (as of 4 p.m. yesterday)
52-WEEK RANGE: $26.83-$42.82
MARKET CAPITALIZATION: $11.46 billion

John Buckingham is the chief portfolio manager of the California-based Al Frank Fund (VALUX), with approximately $305 million under management. D.R. Horton is the largest homebuilder in America. Mr. Buckingham spoke to David Dalley of The New York Sun and explained why, as a value investor, D.R. Horton is one of his favorite buys.

What does D.R. Horton do?

They are a homebuilding company. The do developments of single-family homes – the stuff that’s been selling like hotcakes for the last decade despite predictions of a housing bubble. They’re the largest homebuilder in the U.S. They operate in 25 states and 74 metro markets. We find that kind of geographic diversification very reassuring, given that certain parts of the country might be in ‘bubblets’ at any one time. There are many reasons to be optimistic about the housing sector generally.

Why do you like the stock?

The company has had 28 straight years of record sales – despite recessions, wars, interest rates, economic weakness, housing bubbles, etc. It’s been able to grow through all of that. With that kind of growth, if they were building something like iPods, there’d be a zero after the share price.

The stock has done extremely well since we bought in 1999. It’s up 800%, but I still think it offers excellent value at the current price. The valuation today is identical to what it was five or six years ago. The stock’s still trading at seven times earnings, which is what it was back then, but earnings have exploded in line with the market price. So the P/E remains as inexpensive as anything you see out there.

Of course everyone is convinced that the housing sector is headed over the cliff, and that’s been the consensus for the last few years, but it hasn’t happened. We could have a slowdown, but DHI has been able to grow in such an environment in the past. Management has said that they think they can grow revenue at 10% to 15%, and earnings at 15% to 20% through the rest of the decade. That growth, with that multiple – that’s extremely attractive to us as value investors.

Why is it trading at such a low P/E?

It comes back to what’s happened historically in housing – it’s been cyclical, despite the fact that annually there hasn’t been a down year in existing home sales on a national basis since the 1960s. In terms of new home sales, only twice have there been downward blips in the last 40 years, and I don’t think that’ll be the case this year. And even if it is, you’re still talking about the company making a ton of money.

Margins are actually expanding and will continue to grow – not as fast as they have been (earnings growth of 50% per year for the last five years) – but they don’t have to do that. Even with just 15% bottomline growth, earnings would double in five years, so the share price should also double over that time span. And the price will double even sooner if profit growth is greater than 15%, which isn’t unreasonable.

What are the biggest risks going forward?

The biggest risk is that the housing market enters a significant and lengthy downturn and that home prices collapse. That’s the big risk on a short-term basis. In the long-term in such an environment, they have the capital to make acquisitions and emerge stronger from a cyclical downturn. So the stock might suffer in the short run, but it will be fine in the long run. What you have here is double-digit growth, a single-digit multiple, and strong visibility on growth. Compare that with a company like Google, where no one knows what earnings will be. In this case, contracts are signed, houses are under construction – there are no surprises.