DHI is undervalued on a PEG basis (PEG < 1) but faces rising litigation and warranty claims that justify the low multiple.

Dr. Horton Q3 earnings report 824.

Dr. Horton. This is their income statement. So this is for the three months ending June. This is buy season. This is 9.2 billion in revenue. So did he just multiply this by four?

Because their last nine months is at 23 billion which is closer to 30 billion in revenues.

DRRI is the ticker for them. Dr. Horton is called America's Builder. Huh, I didn't know that. Let's go look. Let's go look at their financials. Dr. Horton Q3 earnings report 824.

we've got revenue, we've got net margins of like 9% of the business. So this is not like the highest margin business that at least they're building in. This is net income 918. Yeah, look at that. 918 divided by 9227. they bring down less than 10%.

there's not that much margin. It's not like they're like I mean, when you say $40 billion on gross, it's kind of misleading because they're making $3 a share and what's it trading for? $148.

So, that's per quarter. EPS is projected to be 1046. So they're making uh $1046 projected annual on 148.6 which is selling for a multiple of 10.46 14x at probably about 14% growth.

It's trading for about a one peg. So it's actually they're actually not that expensive right now.

Yeah, because they've had negative earnings growth, which is expected to bottom now. Plus 16 Oops, I screwed that up. 12.69 plus608 plus 3179 + 19.0 interesting forecast. I mean, I got forecast growth is about 19.9, right?

So the valuation of this company is 14 divided by 19.97 peg. Holy smokes. That's low right now. That's incredible.

Is there balance sheet trash or what's going on? That's really cheap though. So I've got t cash at $2 billion. deferreds. Holy smokes, dude. Yeah, they Well, they need to sell these inventories. $9 billion of inventory. 9 to 11 billion.

Gh, that's a lot of bills. $12 billion in bills. Yikes. But they don't have long-term debt. Uh oh. Well, it's just not ah no notes payable could be long-term. Those are seven. So, their bills are actually 1.3 uh call it 1.4 plus 3.6ish.

Six 5 billion in bills, 7.1 billion in long-term. Yeah, it's not great. They need to sell those homes so just to pay their bills. Are they raising money or what are they doing?

This is uh a refi right here. and borrowing and they're rebying stock. 2.2 billion buybacks. Interesting.

Dr. Horton versus what's it called? What did I say? Toll Brothers uh median home sales price. So Dr. Horton on average sells for $370,000.

Dr. Horton, the largest home builder, faces litigation involving thousands of Louisiana homes who say Shauny building practices failed to keep the moisture out. That's probably why they're selling for, you know, such a low multiple.

Its reservations for claims have risen to 1.1 billion at the end of uh fiscal 25. Wow. Self- insurance reserve earmarked for liabilities 21%. Dear Horton didn't respond. Dear Horton didn't respond.

So, here we got our connector plates that hold these members together. And well, that's what I'd like to call Bluetooth penetration. Builders never were good at penetration.

Here's an example where in the same video we show the Dr. Horton, America's builder sign in the background and this idea about, oh, they make $40 billion.

Well, first of all, they don't. Uh, Dr. Horton is expected to make about $32 billion, which means the Tik Tocker himself was off by a factor of 20%.

A company like Dr. Horton, while they might bring in $32 billion a year, 9.2 per quarter, they're only bringing 13.2% of that down to operating income. And after taxes, they're bringing down less than 10% of the bottom line.

That's almost as bad as restaurants. Like Chipotle makes more net income. That said, it's not just Dr. Horton. It's Toll Brothers, which has a 3x median home sales price. I want to say Dr. Horton's home sales price on the median level is about $360,000.

So maybe there is an incentive to cut corners or maybe there's just an incentive not to look. I kind of think there's the reality that 95% of real estate work gets done about 95% completely. that last 5%, nobody really wants to go back and look and make sure it's done.

Was the anti-tip bracket on the stove? Did we do all the insulation right? Was every nail put in correctly. And that's why engineers do design homes to where they don't rely on every single screw. There's a lot of redundancy.

I'm not making excuses for builders. It should all be fixed. But my point is, a lot of this is serving a different purpose.

that uh post that we saw in the attic, the 2x4, in addition to what we're about to see with the Fleer camera, and I'm going to explain that purpose. Okay, so basically what this is is marketing for a home inspector and it is brilliant marketing.

First of all, they're showing a fleer camera where we know a roof leak was patched and there's no insulation and that's what it looks like. So it's not like the Fleer camera discovered this roof leak.

However, it can discover missing insulation and it can discover things.

Great marketing though because most of us don't have a Fleer camera. I do. And I have to say I have personally found missing insulation in my own home from a 2008 home builder.

And I called them before my 10-year warranty was up and they came back and fixed it.

Now, should I had to have deal with that? Should I have had to get a Fleer camera? No. But when we bought the home, we inspected it. I actually inspected it myself and found the issue and called them and they fixed it.

Should the problem have been there? No. Am I trying to defend them? No. But they did come back and fix it.

And as somebody who's involved in real estate, I know this is just what real estate is. This was an example where this is a window right here. This is missing insulation. When you open the drywall here, there was just a whole patch of insulation missing there.

So like the heating because this was in the winter, the heating was just getting sucked out of this room because the insulation was missing. You had this whole hole. It's like a leaky ship, you know? It's like what is this?

Which that then brings up what's going on with mold claims. This is really common. And then there are also a lot of claims about well I mean they just don't build American real estate like they build in other areas.

Let's start with that one. We'll get that out of the way because this is a Tik Tok compilation. We're going to talk about more.

So, what's actually very interesting about this is this Tik Tok is American guy in Germany and this is America versus Germany and it's sort of a reaction video. So, let's just watch part of this and then we'll explain.

So, before we get into the American wall here, just be clear about a few things. In Germany, it's also born in Germany. Uh, bigger walls pretty normal. Masonry walls pretty uh normal.

But the sound on the wall I could also make on an American wall depending on where I hit it.

And this is one of the tricks that a lot of people uh don't like talking about because it doesn't make for good Tik Tok content. It's not the stuff that goes viral for everybody's like, "Ah, oh, damn. Homebuilders are screwing everybody." Right?

Okay. If I go up to a drywall wall like this, you know, I'm not going to see the stud the framing members on the inside, but you know, you could hear you could hear where the studs are.

You could use a stud finder. If I go hit right here, it's going to sound hollow and like crap. If I go hit on the drywall right where the stud is, it's going to sound just as solid as the guy in the German wall video.

Now, a lot of German walls are so much thicker because yes, a lot of them are built out of uh masonry cores and then they tend to drywall over them because you don't want a plaster wall to go hang your TV on.

It's hard to drill into. It's hard to hang pictures into. It's hard to live with a plaster wall. That's why we even stopped doing plaster in like the 1940s in areas where woodframe construction is very normal, like post and beam construction in Southern California, for example.

Now, why do we use wood construction in California when they're using masonry construction? All depends on where you are. If you look at construction in South Florida, you will almost always find the first floor of a southern Florida home where I also happen to grow up is cinder block, iron rebar and filled cinder block because you have hurricanes.

So, you have to be able to withstand hurricane force. Category 5 uh winds plus the tornadoes that could spawn in a hurricane. They tend to spawn if I remember correctly in the top left quadrant is usually in a hurricane where the tornado tornadoes tend to spawn.

I guess that's where you get the right kind of circulation for tornadoes. Stupid little trivia there for you. Uh but anyway, uh the homes are built for Florida with cinder block.

Okay. Well, that's American real estate. Well, why don't we build them with cinder block in California? Because we have earthquakes and cinder block in an earthquake cracks and crumbles.

Not ideal. Unless you want to go full steam, sorry, steam, full full steam ahead on steel, then you can go full steel like you do in a high-rise or a larger commercial building.

But now you're paying substantially more and it's unaffordable for a regular homeowner. So what do we do? Build out of wood. Why? Because wood flexes. In an earthquake, your house can actually move and drywall might tear, which the drywall actually somewhat acts as a little bit of sheathing.

Not much, but the plywood typically helps with that. that's much better or OBS is commonly used. Um, but wood flexes on purpose in an earthquake so that you have less structural damage in the event of a big earthquake.

That's by design. It's also why now we use uh, you know, Simpson strong ties or or frames at the corners of homes to help keep them more stable. I've got one in the studio that I'm filming in right now. This is 2008 construction. It's newer.

Unfortunately, that then brings us to this where, you know, now we're going to show you the American wall and it just makes for really good TV, but it's really misleading to what's going on. So, here's the misleading knock.

Yeah, it's actually gypsum. It's drywall. Yes, it it's basically paper. But, uh, again, we made you the example. The home isn't framed and built up on drywall. It's framed on framing, and that's not what he hit.

And that's also not what he does here, which is also misleading.

All right. So, drove his pen through this foam insulative barrier, avoiding the studs that actually frame the house. And neglecting to mention that this is just an insulative membrane that is placed on the studs, which are the framing of the home, and before the Stuckco is applied to the home.

So, you're really like sticking a hole through a skeleton and going, "Ha, where's your six-pack, bro? You're weak." Like, "Well, bro, there's no skin. There's no muscle. You haven't put the actual stucco outer layer on yet."

So, misleading stages of construction. Not fair.

All right, that's fine. Enough of the Tik Tok. Let's now talk about mold and then what to deal with this. So, take a look at this. Here's a Wall Street Journal article where mold is driving America's homeowners crazy and they want builders to pay.

And basically, what's happening is there's a sky rocketing level of litigation against builders for claims of mold in homes. Obviously, water leaks, construction defects, they happen.

And there are legitimate lawsuits and then there are illegitimate lawsuits. We don't really know who's is whose and ultimately that's up to a jury to decide. But what I tend to find is when markets lose value, litigation claims go up.

So you see both a rise in legitimate claims and a rise in illegitimate claims.

What we're seeing right now are acred liabilities at KB Holmes, Dr. Horton and uh and other builders are rising much more so at Dr. important but also Toll Brothers is seeing their warranty reserve rise

Now why could that be happening? Well, one of the reasons this could be happening is because some homeowners did unfortunately buy at a not great period of time in my opinion. For example, the Wall Street Journal shows this individual's home, uh, Ashley Frasier's home.

Uh, Frasier has spent $75,000 on experts for her mold lawsuit. Now, maybe something really, really bad happened, but this is the sample. Now, that looks like mildew, but understand what this is.

This is a vanity cabinet. This is a sink. This could have been something as simple as improper silicone sealing at the top. Or who knows, maybe her children were using this cabinet.

It all spilled along the back and it wasn't sealed and it dripped into the cabinet and then the mildew grew in here or the mold, whatever you want to call it, right? This is a problem.

But let me tell you this, it's not a $75,000 problem. Just like the stud at the beginning was a $50 problem. that cabinet right here. If that's the extent of the mold issue, which maybe it's much more than that, but if that's the extent of the mildew issue, we're talking about a maybe a $600 dual sink vanity and the labor to repair drywall, the plumbing that's causing the issue, uh, demo and reinstall, you're under a $10,000 issue for a bathroom mildeo issue.

You know, of course, if you got a backing up pipe and that's like a line under the bathroom and you got to jackhammer it up, hey, you know, maybe it turns into a $40,000 issue.

But my point is, both of those numbers are still less than $75,000 being spent on experts. And that's because in America there is a little bit of a latigious lottery hope that you're going to be able to make a massive settlement that'll make that $75,000 investment turn into a massive litigation settlement worth millions of dollars.

That's a litigation lottery. That's the hope. But unfortunately, this area where Ashley bought, which apparently she bought in August of 2022, August of 2022 saw home prices at about $253,000.

Home prices at the beginning of this year in that area sat at about 230 and they've sat at a low of 225 and they've now settled at about $249. So in other words, she may have bought