D.R. Horton

America’s HomebuilderAmerica’s Homebuilder

Outline

� Current homebuilding trend

� Major homebuilders are undervalued

� What is the driver for growth?� What is the driver for growth?

� How to capitalize on growth

� Other positive factors

� Potential risks

Homebuilding Industry Trends

•Major Consolidation

•Top 10 companies control 20% of the market

•Interest rate declines have boosted growth•Interest rate declines have boosted growth

•Declines in interest rates fuel housing growth because more people are willing to finance their houses

•Population growth also fuels the industry

Major Players

DR Horton Centex Lennar Pulte

Market Cap: 6.99B 6.11B 7.14B 5.58B

Employ-ees: 6,348 17,540 9,419 9,200

Rev. Growth (ttm): 29.50% 17.70% 21.40% 38.80%

Revenue (ttm):

Gross Margin (ttm): 22.64% 11.89% 15.55% 10.73%

EBITDA (ttm): 1.14B 1.24B 1.20B 970.96M

Oper. Margins (ttm): 12.31% 10.02% 12.86% 10.73%

Net Income (ttm): 699.73M 737.61M 751.39M 617.32M

EPS (ttm): 2.997 11.49 4.612 4.898

PE (ttm): 10.04 8.55 9.82 9.17

PEG (ttm): 0.63 0.54 0.58 0.62

PS (ttm): 0.76 0.59 0.8 0.62

Outline

√ Current homebuilding trend

� Major homebuilders are undervalued

� What is the driver for growth?� What is the driver for growth?

� How to capitalize on growth

� Other positive factors

� Potential risks

Large Homebuilders are

undervalued

� Average price-to-book value of 2.2X

� Average P/E ratio of 7.8x

� Annualized EPS growth of 14% over past 19 years

Causes of Undervaluation

� Primary:� Cautious attitude toward an increase in interest

rates.

� Secondary:� Major crash in the early 1990’s caused serious

problems.

Outline

√ Current homebuilding trend

√ Major homebuilders are undervalued

� What is the driver for growth?� What is the driver for growth?

� How to capitalize on growth

� Other positive factors

� Potential risks

Interest rates are not the

primary driver of this industry

� According to Michael Porter, a world renowned business strategist and Harvard Business School professor, the primary driver of the housing industry is population growthof the housing industry is population growth

� Interest rates aren’t even a secondary driver, according to Michael Porter

D.R. Horton is positioned well

geographically

D.R. Horton has operations in 9 of the 10 fastest growing state, in terms of population

Market valuations will change

over the next few years

� The market assessment of this industry will change, once it realizes that population growth has the most significant impact

Outline

√ Current homebuilding trend

√ Major homebuilders are undervalued

√ What is the driver for growth?√ What is the driver for growth?

� How to capitalize on growth

� Other positive factors

� Potential risks

Earnings are historically

volatile

� Earnings volatility has been cut in half recently

D.R. Horton has the most consistent earnings � D.R. Horton has the most consistent earnings of the major homebuilders

� It also controls a lot of the market, as it is the largest homebuilder in the market

D.R. Horton Vs. the Competition

Stability creates potential for

appreciation

� Benefit:� Stability of earnings allows D.R. Horton a great

potential to capitalize on revaluation of the industry as interest rates riseindustry as interest rates rise

� Time Frame:� 2-5 Years

Outline

√ Current homebuilding trend

√ Major homebuilders are undervalued

√ What is the driver for growth?√ What is the driver for growth?

√ How to capitalize on growth

� Other positive factors

� Potential risks

Other benefits

� D.R. Horton is more geographically diverse than in the past

� Use option contracts to control land

� Organic revenue growth for 2003� Planning to grow to $10B in revenues

� Stronger balance sheets than before

� Have Economies of Scale benefits

D.R. Horton Vs. Real Estate Index

Outline

√ Current homebuilding trend

√ Major homebuilders are undervalued

√ What is the driver for growth?√ What is the driver for growth?

√ How to capitalize on growth

√ Other positive factors

� Potential risks

Potential Risks

� Can sustain interest rate increases of about 200 to 300 basis points without any significant effects� Beyond this level, the effects are unknownBeyond this level, the effects are unknown

� Have communication problems within the company

� Stand risk of becoming complacent

Outline

√ Current homebuilding trend.

√ Major homebuilders are undervalued.

√ What is the driver for growth?√ What is the driver for growth?

√ How to capitalize on growth.

√ Other positive factors

√ Potential risks

Any Questions?