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D.R. Horton (DHI) to Gain From Inorganic Moves & Land Investment

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D.R. Horton (DHI - Free Report) has been reaping benefits from robust housing market fundamentals, industry-leading market share, solid inorganic strategy, well reserved supply of land, lots and homes as well as an affordable product offering across multiple brands.

Recently, D.R. Horton reported second-quarter 2021 results, wherein earnings and revenues beat the Zacks Consensus Estimate. Moreover, the top and the bottom line grew 43% and 95% year over year, respectively. The upside can be primarily attributed to solid home closing volumes across all regions, namely, East, Midwest, Southeast, South Central, Southwest and West, increase in net sales orders, robust backlog of homes and improvement in overhead margins.

Major Growth Drivers

Robust Past Results: D.R. Horton has a solid earnings and revenues surprise history, having surpassed the Zacks Consensus Estimate in 12 of the trailing 14 quarters. The trend is expected to continue in the near term as well, supported by solid results for fiscal 2020 and first-half fiscal 2021.

The company reported very strong results for the first six months of the year, with net sales orders increasing 43% year over year to 47,477 homes and 53% in value to $15.3 billion, 93.5% growth in consolidated pre-tax income to $2.2 billion and a 44% increase in Homebuilding revenues to $11.9 billion. Also, with 65,388 homes closed in fiscal 2020, D.R. Horton completed its 19th consecutive year as the largest homebuilder in the United States. During fiscal 2020, adjusted earnings and revenues increased 42% and 15%, respectively.

Inorganic Drive & Land Investment: D.R. Horton largely depends on acquisition for expansion. The company is very rapidly acquiring homebuilding companies in preferred markets and is also consistently investing in lots and land. For first-quarter fiscal 2021, homebuilding investments in lots, land and development totaled $1.95 billion, of which $1.13 billion was for finished lots, $490 million for land development and $330 million to acquire land. For the second quarter of fiscal 2021, the company’s homebuilding investments, and lots, landed development totaled $1.7 billion, of which $980 million was for finished lots, $440 million for land development and $290 million was allotted for land acquisition. The company has been bolstering investment in lots for the proper supply land which will deliver revenues for 2021 and beyond.

D.R. Horton has particularly invested in well-priced lands and lots to bring new communities in the most advantageous markets. The company has a good stock of land and plots to meet the housing market demand in the near term.

Improved Housing Market & Affordable Homes: Declining mortgage rates have been driving the U.S. residential market in recent times. Overall, the U.S. housing market seems to be back on track, defying headwinds like low inventory levels, tight lending conditions, and broad-based economic as well as public health risks associated with the pandemic. Revival of housing demand has been a boon for D.R. Horton and companies like PulteGroup, Inc. (PHM - Free Report) , NVR, Inc. (NVR - Free Report) and M.D.C. Holdings, Inc. (MDC - Free Report) .

Lately, owing to rising building material costs as well as land and labor shortages, homebuilders are raising home prices. At this time, D.R. Horton has strategically shifted toward entry level economical homes, thereby witnessing higher demand from first-time buyers.

Lower Costs & Improved Returns: D.R. Horton’s top management is continuously trying to bring down the construction and selling, general and administrative (SG&A) expenses. The company has been trying to construct in a cost-efficient way and get materials and labor at a combatively lesser price. The company’s SG&A expenses are being reduced to control overall costs and increase the fixed cost leverage. The company expects to improve the fixed cost leverage for fiscal year 2021.

D.R. Horton manages the pricing, incentives and sales pace across its markets in such a way that it would maximize return on investments. The company's return on equity was 27.1% for the fiscal second quarter, up 800 basis points year over year. Homebuilding return on inventory (ROI) was 31.2% for the fiscal second quarter versus 20.2% a year ago. Notably, the company’s homebuilding ROI has improved over the years (except in fiscal 2019). The metric rose from 18.1% in fiscal 2019 to 24.6% in fiscal 2020.

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PulteGroup, Inc. (PHM) - free report >>

NVR, Inc. (NVR) - free report >>

D.R. Horton, Inc. (DHI) - free report >>

M.D.C. Holdings, Inc. (MDC) - free report >>