Forestar Group (NYSE:FOR) stock recently dipped from its 52-week high of $40.92 down to about $31. The stock could be holding a multiple-month support level from an oversold condition as the price moved up to $31.31 from the support level around $30. Forestar has positive fundamental conditions going for it, which could drive the stock higher from here. Forestar faces favorable conditions in the real estate development market, while the company has a good strategy for growth.
Company Background
Forestar Group operates as a residential land development company. As of the end of 2023, Forestar had active operations in 57 markets across 23 states. Forestar tends to focus on land acquisition and then develops the land and installs infrastructure for single-family residential lots. The company then sells these lots to homebuilders. Forestar focuses on developing land for first-time and second time (move-up) buyers, which are the largest segments of the new home market. As a result of a 2017 merger, Forestar was 75% owned by D.R. Horton (DHI). However, D.R. Horton’s stake in Forestar (as measured by common stock ownership) dropped to 63% as of the end of 2023.
Forestar is one of the largest residential community developers in the nation, which develops 1 in every 50 single-family homesites in the United States. The stars on the map below shows Forestar’s 57 markets that are actively being developed:
Forestar’s 2024 Growth Outlook
Active listings of homes have been low in many of the areas that Forestar is developing. The following areas have low housing inventories where Forestar Group has active operations: Seattle; Sacramento & Riverside County, CA; Phoenix & Tucson, AZ; Minneapolis; Indianapolis; Cincinnati & Columbus, OH; Philadelphia; the suburban Washington D.C. area; West Virginia; Virginia; New Mexico; Texas; Alabama; Des Moines; Nashville; and North Carolina. This puts FOR in a great position to meet the demand in the markets where the housing supply in low.
What is important to note is that Forestar is well positioned to benefit from builder demand for finished lots. For example, Florida has a better supply/demand balance than most other areas in the U.S. for homes. So, while inventories of available home listings are higher in Florida, the demand is also high. Florida lead the U.S. in new home construction due to high demand. Florida has become a destination for many due to the warm weather, no state income tax, and nice beaches. As a result of the high housing demand, Forestar has 14 sites under development in Florida. This can generate a significant amount of revenue for the company over multiple years.
One important factor that can help drive Forestar Group’s growth is the company’s performance and financial strength. Positive results were evident in Forestar’s fiscal Q2 2024 earnings report. Revenue increased about 11% to $334 million, beating estimates by nearly $8 million. GAAP EPS for Q2 increased by an impressive 65% to $0.89 year-over-year, beating estimates by $0.17. Forestar’s ROE increased 3.2% to about 15% for the trailing 12-month period ending in March 2024. FOR also increased book value per share by 16% to $29.09 in Q2. This was achieved as Forestar’s residential lot sales increased 10% to 3,289 lots.
Strong positive results have a good chance to continue in 2024 in my opinion. The reason for that is because Forestar increased its owned and controlled lots by 26% to 96,100 lots (57,400 owned & 38,700 controlled). This gives the company a good runway for growth going forward as Forestar develops these lots, making them ready for sale to homebuilders. Forestar is poised to benefit from the shortage of finished lots for the homebuilding industry. The company expects to deliver between 14,500 and 15,500 lots while achieving $1.4 billion to $1.5 billion in revenue during fiscal 2024.
Forestar’s Strong Balance Sheet & Liquidity
Forestar has a strong balance sheet and liquidity for a capital intensive business. The company has 2.3x more current assets than current liabilities and 2.3x more total assets than total liabilities for total equity of $1.47 billion. Forestar has $416 million in total cash & equivalents and net debt of $298 million.
FOR’s balance sheet also shows that its total real estate value was $2.1 billion at the end of fiscal Q2, 2024. This is $325 million, or 18% higher than the real estate value at the end of September 2023. This is also 6% higher than the real estate value at the end of fiscal Q2, 2023.
Forestar also has $380 million of capital availability on an undrawn revolving credit facility. The combination of cash & equivalents along with the credit facility provides Forestar with $800 million in liquidity. This capital availability is a competitive advantage for Forestar. Other land developers tend to use project level development loans which can be more restrictive with floating rates, which can create administrative complexities. The current volatile rate environment does not favor project level loans. Forestar has the liquidity and operational flexibility to acquire land when attractive opportunities arise without taking on project level loans. Forestar plans on using this competitive advantage as a strategy to achieve its goal of doubling its market share to 5% over the next few years.
Forestar Has An Attractive Low Valuation
The recent sell-off for the stock created an attractive low valuation. FOR is trading with a forward PE of 8x and a price to book ratio of 1.08. The real estate development industry is trading higher with a forward PE of 13.9x and a price/book of 1.26.
The company is expected to grow EPS at 6% in fiscal 2024 to $3.84 and 3.7% to $3.98 in fiscal 2025 according to consensus estimates from Forestar Group’s covering analysts: (Carl Reichardt from BTIG, Anthony Pettinari from Citi, Michael Rehaut from J.P. Morgan, and Truman Patterson from Wolfe Research).
While this expected earnings growth isn’t the double-digit annual growth that I typically seek out, it looks sufficient to drive the stock higher from the low valuation. The single-digit PE ratio leaves plenty of room for multiple expansion as FOR continues its market share growth. My opinion is that FOR’s market share growth might be the main driver for the stock to go higher from this low valuation level.
Forestar Group’s covering analysts have a one-year price target of $41.33. This is $10 or 32% higher than the current price. The price target looks reasonable as it would take the PE ratio to 10.8x based on expected EPS of $3.84 for fiscal 2024 or to 10.4x based on expected EPS of $3.98 for fiscal 2025.
Forestar Group’s Technical Perspective
FOR’s daily chart shows the stock holding a multiple-month support level since December 2023 just above $30. The purple RSI indicator (bottom of the chart) increased slightly recently from a near oversold condition. If the price continues to move higher from here, FOR’s stock could be on its way to the price target of $41. However, a break below the $30 support level could lead to a further correction.
It appears that the recent sell-off for the stock was due to profit taking from an overbought condition before earnings were released. The recent earnings report acted as a sell-the-news event, even though Forestar’s results were positive. A similar move occurred around the previous fiscal Q1 2024 earnings report, where the stock dropped after a positive report and then recovered significantly over the next few months.
Risks That Could Drive Forestar’s Stock Lower
Here are some risks that could cause the stock to drop below the $30 support level. The main risk facing Forestar Group is D.R. Horton’s 63% stock ownership. D.R. Horton has the ability to control the outcomes of issues that stockholders vote on. Under this scenario, as long as D.R. Horton or its affiliates owns 35% or more of Forestar’s voting securities, FOR cannot take certain actions without DHI’s approval. This could hinder Forestar’s ability to grow through acquisitions, to issue new stock, and other fundamental changes to the business. Therefore, Forestar is at the mercy of D.R. Horton’s approval for some major business decisions. If D.R. Horton did not act in favor or in the interest of Forestar on such decisions, it could have a negative impact on the stock.
Changes in the economy or real estate market could have a negative impact on Forestar. If inventories of available homes increased significantly, it could lower the demand for+ FOR’s developed land from home builders. A significant downturn in the economy could lower the demand for homes and put development projects on hold. Higher interest rates could also lower the demand for homes and land development projects.
Forestar Group’s Long-Term Investment Outlook
The low inventory of available homes is positive for Forestar over the next few years if this condition continues. Forestar’s efforts to double market share over the next few years by leveraging its financial strength is the likely catalyst that could drive the stock higher. The recent dip in the stock price and valuation level provides a good entry point for investors.