Forestar Group (FOR)

Residential lot developer Forestar Group (NYSE:FOR) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 21.6% year on year to $670.5 million. Its non-GAAP profit of $1.70 per share was 34.9% above analysts’ consensus estimates.

Company Overview

As a majority-owned subsidiary of homebuilding giant D.R. Horton, Forestar Group (NYSE:FOR) develops and sells finished residential lots to homebuilders, focusing primarily on land acquisition and development for single-family homes.

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Forestar Group's competitors include other land developers and lot suppliers such as St. Joe Company (NYSE:JOE), Five Point Holdings (NYSE:FPH), and privately-held land development companies that operate in regional markets. The company also competes with homebuilders that maintain their own land development operations.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Forestar Group grew its sales at a 12.3% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Forestar Group’s recent performance shows its demand has slowed as its annualized revenue growth of 7.6% over the last two years was below its five-year trend.

We can better understand the company’s revenue dynamics by analyzing its number of number of lots sold, which reached 4,891 in the latest quarter. Over the last two years, Forestar Group’s number of lots sold averaged 2.8% year-on-year growth. Because this number is lower than its revenue growth, we can see the company benefited from price increases.

This quarter, Forestar Group reported robust year-on-year revenue growth of 21.6%, and its $670.5 million of revenue topped Wall Street estimates by 21.3%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Forestar Group’s operating margin has been trending down over the last 12 months and averaged 14.6% over the last two years. The company’s profitability was mediocre for a consumer discretionary business and shows it couldn’t pass its higher operating expenses onto its customers.

In Q3, Forestar Group generated an operating margin profit margin of 16.6%, down 2.3 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Forestar Group’s EPS grew at a weak 21.3% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 12.3% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

In Q3, Forestar Group reported adjusted EPS of $1.70, up from $1.60 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Forestar Group’s full-year EPS of $3.31 to shrink by 8.7%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

While Forestar Group posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Forestar Group’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 11.4%, meaning it lit $11.37 of cash on fire for every $100 in revenue.

Forestar Group’s free cash flow clocked in at $255.6 million in Q3, equivalent to a 38.1% margin. This result was good as its margin was 16.6 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Forestar Group historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.3%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Forestar Group’s ROIC averaged 1 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Forestar Group reported $379.2 million of cash and $802.7 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $216 million of EBITDA over the last 12 months, we view Forestar Group’s 2.0× net-debt-to-EBITDA ratio as safe. We also see its $4.6 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Forestar Group beat analysts’ EPS expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock remained flat at $27.92 immediately after reporting.

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Forestar Group.

Forestar Group falls short of our quality standards. To kick things off, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. On top of that, Forestar Group’s , and its projected EPS for the next year is lacking.

Forestar Group’s P/E ratio based on the next 12 months is 9.2x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $32.25 on the company (compared to the current share price of $27.92).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.