D.R. Horton currently trades at $135.30 per share and has shown little upside over the past six months, posting a small loss of 1.7%. The stock also fell short of the S&P 500’s 5.6% gain during that period.

Is there a buying opportunity in D.R. Horton, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is D.R. Horton Not Exciting?

We're swiping left on D.R. Horton for now. Here are three reasons why you should be careful with DHI and a stock we'd rather own.

1. Backlog Declines as Orders Drop

In addition to reported revenue, backlog is a useful data point for analyzing Home Builders companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into D.R. Horton’s future revenue streams.

D.R. Horton’s backlog came in at $5.48 billion in the latest quarter, and it averaged 19.4% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for D.R. Horton, its EPS declined by 5.6% annually over the last two years while its revenue grew by 2.4%. This tells us the company became less profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

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.

Final Judgment

D.R. Horton isn’t a terrible business, but it doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 10.4× forward P/E (or $135.30 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.

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