DFH - Dream Finders Homes: Shorts Believe The Rally Will Not Last

2023-07-13 16:21:29 ET

Summary

• Today, we take our first look at Dream Finders Homes, Inc. a homebuilder whose stock has rallied despite mortgage rates approaching seven percent.
• However, shorts appear to be targeting the stock, as approximately a fifth of the shares are held short.
• Which way will Dream Finders Homes stock go from here?  An investment analysis follows in the paragraphs below.

For me, it is far better to grasp the Universe as it really is than to persist in delusion, however satisfying and reassuring .”? Carl Sagan.

Today, we shine the spotlight on Dream Finders Homes, Inc. ( DFH ) . Like so many of its brethren, the company's stock has performed very well here in 2023 despite a fall in overall housing activity and average mortgage rates closing in on the seven percent threshold.

The stock's performance has been fantastic this year, with the stock up over 160% for 2023 year-to-date. The shares have now attracted a significant short position. Can the good times roll on or is a pullback overdue? An analysis follows below.

Company Overview:

Dream Finder Homes, Inc. is headquartered a few hours' drive north of me in Jacksonville, FL. The company builds and sells single-family entry-level, and first-time and second time move-up homes. Its communities are primarily in Charlotte, Raleigh, Jacksonville, Orlando, Denver, the Washington D.C. metropolitan area, Austin, Dallas, and Houston. After a big rally in 2023, the stock trades just north of $25.00 a share and sports an approximate market capitalization of just north of $2.3 billion.

First Quarter Results:

The company posted its first quarter numbers on May 4th. The company had GAAP earnings of 49 cents a share as revenues rose nearly 16% on a year-over-year basis to $767 million. This was up from the 43 cents a share of profit the company had in 1Q2022.

Active community count increased seven percent to 220 from the same period a year ago. Home closings in the quarter rose 11% to 1,517 while average selling price was up four percent to just over $490,000. The company ended the quarter with a backlog of nearly 5,500 sold homes with a value of approximately $2.5 billion.

The following table shows the backlog units and ASP as of March 31, 2023 by segment:

Impressively, new home orders increased a bit over 30% on a quarter-over-quarter basis to 1,480 and the cancellation rate came in at 20.9% for the quarter, much better than the all-time high cancellation rate of 32.1% the company saw in 4Q2022. That said, new home orders were 2,402 in the first quarter of 2022 with a cancellation rate of just 13.4%. Management provided guidance calling for 6,000 home closings in FY2023. The company has 6,878 home closings in FY2022 and 4,874 in FY2021.

Analyst Commentary & Balance Sheet:

The four analyst firms (Bank of America, BTIG, RBC Capital, Wedbush) who have provided ratings on Dream Finders over the past year all have Hold or Sell ratings on the stock. Price targets proffered range from $8 to $24 a share.

Approximately 20% of the outstanding float in DFH is currently short. The company's COO sold nearly $2 million worth of equity on June 20th. The CFO also sold $50,000 worth of shares that day as well. That has been the only insider activity in the shares in 2023 to date.

Total liquidity fell to $453 million at the end of the first quarter from $486 million at the start of FY2023. Total liquidity is comprised of cash, marketable securities as well as total availability on existing credit lines.

Verdict:

Dream Finders Homes, Inc. made $2.45 a share in profit in FY2022 on revenues of $3.34 billion. The current analyst firm consensus is that sales will fall in the low teens in FY2023 and profits will come in at $1.73 a share in FY2023. They see mid-single digit revenue growth in FY2024 with profits improving to $1.93 a share.

It is hard to get too enthusiastic about any homebuilder stock right now. Housing affordability is near historic lows , and outside a recession, it is hard to see average mortgage rates coming down sharply over the next year. Home prices have held up well given the average mortgage rate has more than doubled since the start of 2022. One reason is that inventory has remained low, as individuals are reluctant to give up their existing low mortgage rate even if it would mean substantial capital gains. However, that could change if job growth reverses, forcing more to list their homes.

Homebuilder stocks are notoriously cyclical, and it is why the sector historically trades at a significant discount to the overall market multiple. Given that, it is hard to justified paying nearly 15 times forward earnings for Dream Finders when both earnings and revenue growth are projected to be negative. It is easy to see why analyst firms are negative on DFH and shorts are targeting the shares at this trading level even as management is performing well and the company's communities are in locations seeing intrastate in migration.

No one who shares a delusion ever recognizes it as such .”? Sigmund Freud.

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