PHM - Dream Finders Homes Contends With Higher For Longer Interest Rate Environment

2023-03-13 19:35:35 ET

Summary

• Dream Finders Homes, Inc. reported its Q4 2022 financial results on March 2, 2023.
• The firm is a prominent regional home builder in various states in the U.S.
• Dream Finders Homes, Inc.'s stock has performed poorly against its peers as it faces the prospect of higher interest rates dampening demand.
• I'm on Hold for Dream Finders Homes in the near term.

A Quick Take On Dream Finders Home

Dream Finders Homes, Inc. ( DFH ) reported its Q4 2022 financial results on March 2, 2023, beating revenue but missing EPS consensus estimates.

The firm is a regional homebuilder active in several markets throughout the United States.

The company's stock has performed poorly against its industry peers.

I’m on Hold for DFH in the near term.

Company

Jacksonville, Florida-based Dream Finders Homes, Inc. was founded to pursue an asset-light strategy to develop and sell single-family homes. DFH has closed sales on more than 9,100 homes since its founding in 2009.

Management is headed by president, Chairman, and CEO Patrick Zalupski, who has been with the firm since founding DF Homes in 2008 and was previously a financial auditor at FedEx Corporation (FDX) and was Managing Partner of Bay Street Condominiums.

The company's primary offerings include:

• Entry level

• First time move up

• Second time move up.

Market & Competition

According to a 2023 market report by Mordor Intelligence, the U.S. residential construction market is expected to grow at a greater than 5% Compound Annual Growth Rate [CAGR] from 2023 to 2028

Driven by trends such as a desire by consumers for increased housing space, "the residential market rebounded exceptionally rapidly, with the value of residential construction investment surpassing pre-pandemic levels before the end of the year 2020."

The rise of inflationary pressures as the pandemic waned has led the U.S. Federal Reserve to increase short-term interest rates sharply, resulting in the curtailment of residential affordability due to higher mortgage costs.

While the cost of various commodities used in construction appears to have peaked, labor costs continue to remain strong.

The firm faces significant competition as barriers to entry are low, enabling individuals to small and large firms to develop properties as financing conditions remain favorable.

Major home-builders in Florida, one of the firm's major markets, include:

• Lennar Homes ( LEN )

• D.R. Horton ( DHI )

• PulteGroup ( PHM ).

DFH’s Recent Financial Results

• Total revenue by quarter has risen according to the following chart:

• Gross profit margin by quarter has trended higher, as shown below:

• Selling, G&A expenses as a percentage of total revenue by quarter have varied within a narrow range:

• Operating income by quarter has risen per the following chart:

• Earnings per share (Diluted) have risen accordingly:

(All data in the above charts is GAAP.)

In the past 12 months, DFH’s stock price has fallen 45.3% vs. that of PulteGroup’s rise of 13.4%, as the chart indicates below:

As to its Q4 2022 financial results, total revenue rose 29% year-over-year while gross profit margin increased by two percentage points.

The firm’s SG&A costs as a percentage of total revenue were flat, but operating income rose markedly both year-over-year and sequentially.

Earnings per share grew to $0.77, the highest in the past eight quarters.

For the balance sheet , the firm finished the quarter with $364.5 million in cash and equivalents and $966.2 million in long-term debt.

Over the trailing twelve months, free cash used was $33.1 million, of which capital expenditures accounted for $5.5 million. The company paid $6.8 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Dream Finders Homes

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be PulteGroup; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha.)

Future Prospects For Dream Finders Homes

In its last earnings release (Source - Seeking Alpha ), covering Q4 2022’s results, management highlighted the "record total home closings of 2,316, an 18% increase" sequentially.

However, management noted the prospect of continued high mortgage rates as negatively affecting demand "throughout 2023."

In addition, the home building industry has been impacted by inflation in both materials and labor.

Looking ahead, leadership expects 6,000 home closings in 2023, or an average of 1,500 per quarter, subject to the usual seasonality.

The company has a backlog of 5,548 units as of quarter end across five major markets plus other areas.

Regarding valuation, the market is valuing DFH at a lower EV/Revenue rate than PulteGroup despite its higher revenue growth rate.

The primary risk to the company’s outlook is continued high interest rates and stubborn services inflation. Goods inflation has likely peaked.

A potential upside catalyst to the stock could include a pause in the rise in interest rates, potentially reducing borrowing costs for home buyers and increasing demand for the firm’s housing inventory.

However, Dream Finders Homes, Inc. stock has been a poor performer over the past year, especially compared to other major home-builders, as the comparison stock price return chart shows here:

Given that poor performance, unless management can produce improved results in a challenging market, I’m on Hold for Dream Finders Homes, Inc.

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