D.R. Horton

Liquidity:

Over the last five years, DR Horton’s balance sheet has experienced a high degree of volatility, primarily arising from the housing bubble that emerged in early 2008. However, in spite of the tumult unleashed by the housing crisis, the firm had maintained a highly liquid operating condition in contrast to its peers. In fact, throughout the depths of the crisis, DR Horton consistently kept its current ratio above 3.50 and retained working capital in excess of $3.5 billion, significantly outperforming the industry. More recently, the firm’s liquidity ratios have fallen below its peers, but the aforementioned decline has been primarily fueled by a reduction in inventory. Thus, upon closer examination, this apparent deterioration signals that the firm’s business is recovering faster than its competitors.

Profitability:

In congruence with its peers, DR Horton posted sizeable losses in 2008 and 2009 in response to the ever-present housing crisis. Demand for new homes dried up and homes under construction were subject to a spiked level of contract cancellations. This resulted in severely depressed margins for the firm, and ultimately led to a return on equity of -79% for fiscal year 2008, coupled with a reduction in the firm’s dividend to common equity holders.

After this initial shock, management revamped the firm’s business, and margins have steadily improved over the past two years. In fact, the firm returned to profitability in 2010, returning approximately 7.41% to equity holders, driven by a 20% increase in revenues and a doubling of earnings per share (EPS). This performance blew away the competition, which still remains in shambles from the housing crisis. Ultimately, this trend will create value for shareholders and translate into a higher share price and reinstatement of the firm’s roughly 6% dividend yield.

Solvency:

From a solvency perspective, DR Horton’s debt burden spiked during the height of the financial crisis, with debt-to-equity...