Over the past six months, D.R. Horton’s shares (currently trading at $148.52) have posted a disappointing 11.2% loss, well below the S&P 500’s 13.1% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy D.R. Horton, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think D.R. Horton Will Underperform?

Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons we avoid DHI, plus one stock we’d rather own.

1. Backlog Declines as Orders Drop

We can better understand Home Builders companies by analyzing their backlog. 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 $6.18 billion in the latest quarter, and it averaged 3.6% 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 Growth Has Stalled

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

D.R. Horton’s flat EPS over the last five years was below its 5.1% annualized revenue growth. 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

We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.

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 doesn’t pass our quality test. Following the recent decline, the stock trades at 13.3× forward P/E (or $148.52 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.

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