D.R. Horton: Building a New Model - [Business Breakdowns, EP.154]

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Mar 13, 2024

In a compelling discussion, Ed Wachenheim, Founder of Greenhaven Associates, dives deep into D.R. Horton, America's largest homebuilder. He explores how the homebuilding industry's business models have shifted over the years, revealing unique investment strategies and the competitive advantages of larger firms. Ed sheds light on the challenges faced by smaller builders and the evolving market for first-time homebuyers. With a fascinating look at financial dynamics and operational efficiencies, he shares insights that redefine homebuilders as manufacturers, not just real estate players.

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ANECDOTE

Learning from Professor Jim

Ed Wachenheim learned about homebuilding in the 1980s from Pulte's CEO, Jim Grossfeld.
He called him "Professor Jim" and bought him beers and coffee for lessons.

INSIGHT

Consolidation Opportunity

The homebuilding industry in the mid-1990s was small, but Ed Wachenheim noticed public companies growing faster than the overall market.
Smaller homebuilders struggled with financing during the thrift crisis, giving larger, publicly-traded companies an advantage and consolidating the industry.

INSIGHT

Old Homebuilding Model

In the past, homebuilders were land-intensive, with thousands of small players holding leveraged balance sheets and low ROEs.
They operated by buying land, developing it, building model homes, and selling, then reinvesting proceeds into more land.

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This is Matt Reustle. Today, we are breaking down D.R. Horton, America’s largest homebuilder. Our guest is Ed Wachenheim, Founder of Greenhaven Associates. Ed takes us through an incredible discussion of D.R. Horton and homebuilders broadly, including how much has changed with this business model over the years.

Ed shares countless entertaining stories with the management teams and backs it all up with the numbers behind this business. It's an excellent conversation and an excellent glimpse at how someone like Ed approaches investments. Please enjoy this breakdown of D.R. Horton.

Ed’s Book: Common Stocks and Common Sense

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For the full show notes, transcript, and links to the best content to learn more, check out the episode page here.

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Show Notes

(00:00:00) Welcome to Business Breakdowns

(00:04:33) First Question - Understanding the Home Building Business Model

(00:06:56) Evolution of the Home Building Industry

(00:09:41) The Impact of Land Ownership on Home Builders

(00:14:29) A Transformation of the Home Building Business Model

(00:17:35) Unique Characteristics of D.R. Horton

(00:24:16) The Geographic Concentration of Home Builders

(00:25:59) Current State and Future of the Home Building Industry

(00:33:44) The Resilience of the Home Building Industry

(00:34:56) Efficiencies and Margins in Home Building

(00:37:02) Forecasting Revenue Growth in the Home Building Industry

(00:40:04) Comparing D.R. Horton vs. NVR

(00:41:23) The Valuation Gap in the Home Building Industry

(00:57:05) The Shift Towards Institutional Ownership in Home Building

(00:58:13) Impact of Interest Rates on Home Building

(01:02:09) Lessons from Evaluating D.R. Horton