We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Can D.R. Horton (DHI) Survive Rising Rate and Inflation?
Read MoreHide Full Article
The current sales activity in the U.S. homebuilding industry is being affected by two primary factors: a lack of available inventory and elevated mortgage rates. Prospective homebuyers are encountering a limited supply of pre-owned homes on the market, prompting them to shift their focus toward builders who have ramped up their construction efforts to meet this growing demand. Many homebuilding stocks have been riding high on this tailwind despite the continuous challenges.
Among the industry bellwethers, D.R. Horton, Inc. (DHI - Free Report) , an Arlington, TX-based prominent homebuilder, has been benefiting from the above-mentioned tailwind, along with its solid acquisition strategies, increased homebuilding lots, decreasing cycle times and diverse product offerings across multiple brands and price points.
Shares of DHI have gained 66.2% over the past year compared with the Zacks Building Products - Home Builders industry’s 76.7% rise. Although DHI shares have underperformed the industry over the said time, this Zacks Rank #3 (Hold) stock has a long-term earnings growth rate of 18.5%, which highlights its inherent strength.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate has witnessed an uptrend over the past 30 days as analysts raised their estimates. Over the said time frame, the Zacks Consensus Estimate for fiscal 2023 and 2024 earnings of $13.24 per share and $14.04 per share has increased 18.1% and 19%, respectively.
Yet, high mortgage rates and lingering inflationary pressures remain headwinds.
Let’s Take a Look at the Growth Drivers.
Acquisitions & Prudent Land Investment: Acquisitions have played a pivotal role in D.R. Horton's expansion strategy. The company is rapidly acquiring homebuilding firms situated in sought-after markets. In June 2023, D.R. Horton completed the acquisition of Truland Homes' homebuilding operations, operating in Baldwin County, Alabama, and Northwest Florida, for an approximate cash amount of $100 million. This acquisition includes nearly 155 homes in inventory, 620 lots, and a sales order backlog of 55 homes, in addition to approximately 660 more lots through land purchase agreements.
During the fiscal third quarter of 2023, the company's investments in lots, land, and development totaled $2.2 billion, marking a 25% year-over-year increase and a 27% sequential increase. D.R. Horton's substantial inventory of land, plots, and homes positions it strongly to meet future demand, thus driving sales and home closings in the upcoming quarters.
With 555,100 lots (25% were owned and 75% controlled through purchase contracts) in inventory at the end of third-quarter fiscal 2023, D.R. Horton is well-poised for the future. With sequentially higher homebuilding lots, the company is actively managing lot and land pipelines and investments in lots, land and development to meet needs during this transition in the housing market.
Focus on Higher Returns: The company strategically manages the pricing, incentives and sales pace across its markets to optimize the returns on inventory investments. DHI’s ROE was 24.3% for the trailing 12-month period that ended Jun 30, 2023, and homebuilding ROI was 31.8% for the same period.
Affordable Homes: The company’s strategic shift toward more entry-level affordable homes has been paying off, with the segment experiencing strong demand and limited supply. First-time homebuyers represented 56% of its closings in third-quarter fiscal 2023.
Value Stock: Given the uncertainty, it will be wise for investors to dedicate their funds to value stocks. Value investing has always been a common strategy. D.R. Horton currently carries a Value Score of A. Its forward 12-month P/E ratio is 8.2 versus industry’s 8.6.
Headwinds
Accelerating Rates: As of Sep 7, 2023, the 30-year fixed-rate mortgage hovered above 7% for the fourth consecutive week. The robust economy continues to uplift consumer confidence. However, the strengthening economic indicators have led to an increase in mortgage rates, placing added strain on prospective homebuyers. As of Sep 7, 2023, the 30-year fixed-rate mortgage stands at an average of 7.12%, showing a slight dip from the previous week when it was at 7.18%. In comparison, one year ago, on the same date, the 30-year fixed-rate mortgage averaged 5.89%, the latest Freddie Mac mortgage survey shows.
Inflationary Pressure: Per the media reports, a noteworthy rise in energy prices is expected to push inflation higher in August 2023. Inflation has consistently exceeded the Federal Reserve's 2% target, and when combined with upward pressure in the oil market and a tight labor market, it indicates that the Federal Reserve is likely to proceed with further interest rate hikes later in the year.
Key Picks
Some better-ranked stocks in the same space are:
Beazer Homes USA (BZH - Free Report) designs, builds and sells single-family homes. Shares of the company have gained 122.1% in the past year.
BZH currently sports a Zacks Rank #1 (Strong Buy). Earnings estimates for fiscal 2023 and 2024 have increased to $4.75 per share and $5.21 per share from $3.95 and $4.46, respectively, over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Taylor Morrison Home Corporation’s (TMHC - Free Report) ongoing operational enhancements, acquisition synergies and robust pricing power have more than offset the inflationary pressure and delays in some closings. Shares of the company have gained 96.3% in the past year.
TMHC currently sports a Zacks Rank #1. The Zacks Consensus Estimate for its 2023 and 2024 earnings has been upwardly revised to $7.05 per share and $7.44 per share from $6.81 and $6.89, respectively, over the past 60 days.
Based in Los Angeles, CA, KB Home (KBH - Free Report) has been gaining from prudent growth plans, a solid existing geographic footprint and a built-to-order approach. Shares of the company have gained 78.8% in the past year.
KBH currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2023 and 2024 earnings of $6.29 per share and $6.85 per share has increased 2.3% and 1.9%, respectively, over the past 60 days.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Can D.R. Horton (DHI) Survive Rising Rate and Inflation?
The current sales activity in the U.S. homebuilding industry is being affected by two primary factors: a lack of available inventory and elevated mortgage rates. Prospective homebuyers are encountering a limited supply of pre-owned homes on the market, prompting them to shift their focus toward builders who have ramped up their construction efforts to meet this growing demand. Many homebuilding stocks have been riding high on this tailwind despite the continuous challenges.
Among the industry bellwethers, D.R. Horton, Inc. (DHI - Free Report) , an Arlington, TX-based prominent homebuilder, has been benefiting from the above-mentioned tailwind, along with its solid acquisition strategies, increased homebuilding lots, decreasing cycle times and diverse product offerings across multiple brands and price points.
Shares of DHI have gained 66.2% over the past year compared with the Zacks Building Products - Home Builders industry’s 76.7% rise. Although DHI shares have underperformed the industry over the said time, this Zacks Rank #3 (Hold) stock has a long-term earnings growth rate of 18.5%, which highlights its inherent strength.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate has witnessed an uptrend over the past 30 days as analysts raised their estimates. Over the said time frame, the Zacks Consensus Estimate for fiscal 2023 and 2024 earnings of $13.24 per share and $14.04 per share has increased 18.1% and 19%, respectively.
Yet, high mortgage rates and lingering inflationary pressures remain headwinds.
Let’s Take a Look at the Growth Drivers.
Acquisitions & Prudent Land Investment: Acquisitions have played a pivotal role in D.R. Horton's expansion strategy. The company is rapidly acquiring homebuilding firms situated in sought-after markets. In June 2023, D.R. Horton completed the acquisition of Truland Homes' homebuilding operations, operating in Baldwin County, Alabama, and Northwest Florida, for an approximate cash amount of $100 million. This acquisition includes nearly 155 homes in inventory, 620 lots, and a sales order backlog of 55 homes, in addition to approximately 660 more lots through land purchase agreements.
During the fiscal third quarter of 2023, the company's investments in lots, land, and development totaled $2.2 billion, marking a 25% year-over-year increase and a 27% sequential increase. D.R. Horton's substantial inventory of land, plots, and homes positions it strongly to meet future demand, thus driving sales and home closings in the upcoming quarters.
With 555,100 lots (25% were owned and 75% controlled through purchase contracts) in inventory at the end of third-quarter fiscal 2023, D.R. Horton is well-poised for the future. With sequentially higher homebuilding lots, the company is actively managing lot and land pipelines and investments in lots, land and development to meet needs during this transition in the housing market.
Focus on Higher Returns: The company strategically manages the pricing, incentives and sales pace across its markets to optimize the returns on inventory investments. DHI’s ROE was 24.3% for the trailing 12-month period that ended Jun 30, 2023, and homebuilding ROI was 31.8% for the same period.
Affordable Homes: The company’s strategic shift toward more entry-level affordable homes has been paying off, with the segment experiencing strong demand and limited supply. First-time homebuyers represented 56% of its closings in third-quarter fiscal 2023.
Value Stock: Given the uncertainty, it will be wise for investors to dedicate their funds to value stocks. Value investing has always been a common strategy. D.R. Horton currently carries a Value Score of A. Its forward 12-month P/E ratio is 8.2 versus industry’s 8.6.
Headwinds
Accelerating Rates: As of Sep 7, 2023, the 30-year fixed-rate mortgage hovered above 7% for the fourth consecutive week. The robust economy continues to uplift consumer confidence. However, the strengthening economic indicators have led to an increase in mortgage rates, placing added strain on prospective homebuyers. As of Sep 7, 2023, the 30-year fixed-rate mortgage stands at an average of 7.12%, showing a slight dip from the previous week when it was at 7.18%. In comparison, one year ago, on the same date, the 30-year fixed-rate mortgage averaged 5.89%, the latest Freddie Mac mortgage survey shows.
Inflationary Pressure: Per the media reports, a noteworthy rise in energy prices is expected to push inflation higher in August 2023. Inflation has consistently exceeded the Federal Reserve's 2% target, and when combined with upward pressure in the oil market and a tight labor market, it indicates that the Federal Reserve is likely to proceed with further interest rate hikes later in the year.
Key Picks
Some better-ranked stocks in the same space are:
Beazer Homes USA (BZH - Free Report) designs, builds and sells single-family homes. Shares of the company have gained 122.1% in the past year.
BZH currently sports a Zacks Rank #1 (Strong Buy). Earnings estimates for fiscal 2023 and 2024 have increased to $4.75 per share and $5.21 per share from $3.95 and $4.46, respectively, over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Taylor Morrison Home Corporation’s (TMHC - Free Report) ongoing operational enhancements, acquisition synergies and robust pricing power have more than offset the inflationary pressure and delays in some closings. Shares of the company have gained 96.3% in the past year.
TMHC currently sports a Zacks Rank #1. The Zacks Consensus Estimate for its 2023 and 2024 earnings has been upwardly revised to $7.05 per share and $7.44 per share from $6.81 and $6.89, respectively, over the past 60 days.
Based in Los Angeles, CA, KB Home (KBH - Free Report) has been gaining from prudent growth plans, a solid existing geographic footprint and a built-to-order approach. Shares of the company have gained 78.8% in the past year.
KBH currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2023 and 2024 earnings of $6.29 per share and $6.85 per share has increased 2.3% and 1.9%, respectively, over the past 60 days.