On Friday, JPMorgan downgraded shares of D.R. Horton (NYSE:DHI), the home construction company, from Neutral to Underweight. The firm also reduced the price target for the company's stock to $156 from the previous $188. The downgrade was based on the assessment that D.R. Horton's stock is overvalued relative to its industry peers when considering the company's fundamental outlook.
The analyst from JPMorgan stated that D.R. Horton's stock trades at approximately 10.7 times and 9.2 times the firm's estimated earnings per share (EPS) for the years 2025 and 2026, respectively. These valuations are about 10% higher than the average valuations of the company's larger-cap peers, excluding NVR (NYSE:NVR), which trade at about 9.6 times and 8.3 times EPS, respectively.
D.R. Horton's price-to-book (P/B) ratio stands at 2.0 times, which is roughly in line with its peers. However, the company's gross and operating margins are expected to remain below average and continue to trail behind the larger-cap peer averages by approximately 150 basis points (bps) and 100 bps, respectively, in the years 2025 and 2026.
Furthermore, while D.R. Horton's return on equity (ROE) is projected to be roughly in line with its peers in 2024, the analyst anticipates that it will fall behind its larger-cap peers by about 100 bps in the subsequent two years. This lag in performance metrics is a key factor in the analyst's decision to downgrade the stock and adjust the price target accordingly.
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