D.R. Horton has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed 18.1% to $168.70 per share while the index has gained 13.4%.

We're swiping left on D.R. Horton for now. Here are three reasons why DHI doesn't excite us and one stock we'd rather own today.

Why Is D.R. Horton Not Exciting?

One of the largest homebuilding companies in the U.S., D.R. Horton (NYSE:DHI) builds a variety of new construction homes across multiple markets.

1. Backlog Declines as Orders Drop

In addition to reported revenue, backlog is a useful data point for analyzing Home Builders companies. 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 $4.77 billion in the latest quarter, and it averaged 25% 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 Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for D.R. Horton, its EPS declined by 6.8% annually over the last two years while its revenue grew by 4.8%. 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

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Over the last few years, D.R. Horton’s ROIC has decreased. We like what management has done in the past but are concerned its ROIC is declining, perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

D.R. Horton isn’t a terrible business, but it isn’t one of our top picks. That said, the stock currently trades at 10.6x forward price-to-earnings (or $168.70 per share). While this valuation could be justified, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d suggest taking a look at Yum! Brands, an all-weather company that owns household favorite Taco Bell.

Stocks We Would Buy Instead of D.R. Horton

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