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Here's Why You Should Buy D.R. Horton (DHI) Amid Challenges

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The housing market is indeed reeling under affordability concerns amid rising mortgage rates and tight supply. Sales are dwindling, and buyers are worried about major hurdles like rising prices and mortgage rates.

That said, there is still a glimmer of hope as Danielle Hale, chief economist at Realtor.com, highlighted, “Our expectation is that home sales will remain relatively high throughout 2022, as homebuyers get creative about how to spend their housing budget amid rising prices of competing expenses like energy, food, and childcare, driven up by inflation,” said Danielle Hale, chief economist at Realtor.com. “So far, buyer activity has been resilient to the extra costs of homeownership, but demand will be tested by an extraordinary year.”

D.R. Horton, Inc. (DHI - Free Report) is one such company that continues to display strength in several areas. Hence, adding the stock to your portfolio should not be a disappointment. D.R. Horton is among the homebuilding companies that remain relatively well positioned, courtesy of impressive performance, its industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots and homes along with affordable product offerings across multiple brands.

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The company’s shares have lost more than 23% year to date, underperforming the Zacks Building Products - Home Builders industry’s 18.8% decline. Nonetheless, earnings estimates for fiscal 2022 and 2023 have moved up 9.1% and 8%, respectively, over the past 60 days. DHI also has a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in 15 of the trailing 17 quarters. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let us delve deeper into other factors that make this stock a profitable pick.

What Makes the Stock an Attractive Pick?

Significant Market Share

D.R. Horton is primarily engaged in the acquisition and development of land along with the construction and sale of residential homes, with operations in 102 markets across 32 states. Acquisitions have been an important part of D.R. Horton’s growth strategy to expand its presence. In October 2020, it acquired homebuilding operations of Braselton Homes, the largest homebuilder in Corpus Christi, TX.

The company has selectively invested in attractively-priced land and lots in the past few years, allowing it to bring new attractive communities in desirable markets. D.R. Horton’s well-stocked supply of land, lots, and homes places it in a strong competitive position to meet the demand in the upcoming quarters, thereby resulting in the growth of sales and home closings. For first-quarter fiscal 2022, the company invested $2.2 billion in lots, land and development, of which $1.2 billion was for finished lots, $570 million for land development, and $390 million was allotted to acquire land.

A strong cash position and low debt/capital ratio allowed it to make strategic land purchases even during the downturn, in turn giving DHI a significant competitive advantage.

Focus on Affordable Homes

Higher building material costs and land and labor shortages are prompting homebuilders to increase home prices. That said, D.R. Horton’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 55% of its closings for first-quarter fiscal 2022.

Higher Operating Leverage

DHI has been making sustained efforts in reducing both construction and selling, general and administrative (SG&A) expenses via controlling construction costs by designing homes efficiently and obtaining construction materials and labor at competitive prices. In fiscal 2020 and 2021, SG&A expenses (as a percentage of homebuilding revenues) declined 50 basis points (bps) and 80 bps year over year, respectively. For first-quarter fiscal 2022, SG&A declined 40 bps year over year.

Solid Earnings Growth Rate

The company has solid prospects, as is evident from the Zacks Consensus Estimate for fiscal 2022 and 2023 earnings of $15.80 and $16.60 per share, which indicates 38.5% and 5.1% year-over-year growth, respectively.

Other Top-Ranked Stocks From the Same Industry

Lennar (LEN - Free Report) currently carries a Zacks Rank #2. This homebuilder continues to gain from effective cost control and focus on making its homebuilding platform more efficient, which in turn is resulting in higher operating leverage.

Lennar has declined 7.4% over a year. That said, earnings are expected to grow 11% in fiscal 2022.

M.D.C. Holdings, Inc. currently holds a Zacks Rank #2. The company’s build-to-order operating model and focus on more affordable homes have been major driving factors.

M.D.C. Holdings’ shares have declined 23.4% over a year. Yet, earnings are expected to grow 35.5% in 2022.

TRI Pointe Group Inc. (TPH - Free Report) currently carries a Zacks Rank #2. This Irvine, CA-based homebuilder designs, constructs, and sells single-family detached and attached homes in the United States. Robust demand and pricing as well as improved operating leverage have been driving TRI Pointe's performance. Cost-cutting initiatives implemented earlier this year and focus on entry-level buyers have been adding to the positives.

TRI Pointe has gained 14% over a year. Earnings for 2022 are expected to grow 21.1%.


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