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D.R. Horton (DHI) Completes Austin’s Forestar Group Takeover


D.R. Horton Inc. DHI finally closed the proposed acquisition of Austin-based Forestar Group Inc. FOR, a residential and mixed-use real estate development company.

With the completion of the transaction, the Texas-based homebuilder acquired 75% of Forestar’s stock at a cash price of $17.75 a share. Forestar’s board had said in June that it had agreed to the deal, which followed a brief bidding war between D.R. Horton and Connecticut-based Starwood Capital Group.

D.R. Horton as well as Forestar will identify land development opportunities to boost Forestar’s platform in its current markets and across D.R. Horton’s national footprint. D.R. Horton has plans of taking over a major portion of the lots Forestar develops at market prices from newly identified land acquisition opportunities.

Forestar owns interests in 49 residential and mixed-use projects comprising 4,400 acres of real estate spanning across 10 states and 14 markets.

This buyout will give a meaningful percentage boost to D.R. Horton’s current holdings of 252,000 lots (owned and under control), as of June 2017. The company is on track to close 45,800 to 46,200 homes in fiscal 2017. The deal would add to D.R. Horton's fiscal 2018 earnings.

Currently, rising land costs and a tight labor market are threatening homebuilders’ margins, thus hampering initiatives taken by them to tap the ongoing strength of the U.S. housing market. Limited capital for land and land development has created a shortage in supply, while growing demand drove prices. The labor market has also tightened with limited availability of workforce, arresting the rapid growth in housing production.

Hence, the Forestar integration is in line with D.R. Horton’s long-term strategy of developing strong relationships with land developers across the country and growing the optioned portion of its land and lot position to enhance both operational efficiency and returns.

On the other hand, the transaction has enabled Forestar to remain a public company, thus ensuring continued access to capital in order to support the increasing scale of the business. The deal will also help Forestar grow organically into a leading residential land development company in the country, by selling developed residential lots to D.R. Horton and other homebuilders.

A Look at D.R. Horton’s Share Price Performance

D.R. Horton’s shares have gained 48.6% year to date, outperforming the Zacks Homebuilding Industry’s growth of 40%. This price performance is backed by impressive earnings surprise history, as the company surpassed the Zacks Consensus Estimate for earnings in three of the past four quarters. The company remains committed toward achieving continued double-digit annual growth in both revenues and pre-tax profits, while generating positive cash flow and improved returns that can instill the upside potential for the stock further.

Zacks Rank & Key Picks

D.R. Horton carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space are Persimmon Plc PSMMY, KB Home KBH and Beazer Homes USA, Inc. BZH.

Persimmon sports a Zacks Rank #1 (Strong Buy) and is likely to witness a rise of 18.3% in earnings. You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home, a Zacks Rank #2 (Buy) stock, is expected to witness 54.9% growth in fiscal 2017 earnings.

Beazer Homes, also a Zacks Rank #2 stock, is expected to witness 67.3% growth in earnings this year.

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