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Time to Buy Housing ETFs Despite Mixed D.R. Horton Earnings?

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D.R. Horton (DHI), one of the biggest and well-known homebuilders in the nation, came up with mixed fiscal first-quarter 2016 results on January 25 before the bell. Though the housing company’s earnings were in line with the Zacks Consensus Estimate, its revenues missed the same. Shares fell 4.7% in the key trading session.

Let’s take a look inside the headline numbers:

Behind the Headline Numbers

D.R. Horton’s adjusted earnings of $0.42 per share in the first quarter of fiscal 2016 matched the Zacks Consensus Estimate and grew 7.7% year over year driven by strong profits and an increase in homebuilding revenues.

Homebuilding revenues of $2.36 billion increased 5% while total revenue (homebuilding and financial services) of $2.42 billion missed the Zacks Consensus Estimate of $2.45 billion. However, the top line grew 5.2% year over year. Home sales also expanded 4.5% year over year to $2.34 billion.

Net sales orders increased 9% compared with the 35% year-ago surge. Analysts’ expectations hovered in the range of 12.5% to 15.5%, as noted by Bloomberg. This bit of information was more worrisome as reduced pace of order growth sparked off the fears of a slowdown in the U.S. economy and in the housing sector.

ETF Impact

The subtle bearishness over such an important homebuilding stock caused a slack in the broad housing ETFs, the day D.R. Horton reported earnings. However, the sector regained ground on January 26 as the S&P/Case Shiller composite home price index of 20 metropolitan areas increased 5.8% in the year to November 2015. As a result, housing companies and the related ETFs got the much-needed relief and shares advanced yesterday (read: Buy the Dip in These Undervalued Sector ETFs & Stocks).

Housing ETFs including SPDR S&P Homebuilders ETF (XHB), iShares U.S. Home Construction ETF (ITB) and PowerShares Dynamic Building & Construction Fund (PKB) declined post DHI earnings but added about 2.1%, 3% and 2.4%, respectively, on January 26 (read: 3 Homebuilding ETFs to Buy on Strong Recovery in Housing).

DHI takes first spot in ITB with an 11.8% weight and eleventh position in XHB with 4.33% exposure. There is another product, UBS ETRACS ISE Exclusively Homebuilders ETN (HOMX), which invests 10.02% of its weight in D.R. Horton.

Bottom Line

DHI has a Zacks Rank #3 (Hold) and a Growth score of ‘A’ and a Value score of ‘B’. Plus, each of the three ETFs has a Zacks ETF Rank #2 (Buy) each, though with a High risk outlook. The homebuilding sector, after having a strong run in 2015, suddenly lost momentum from the end of the year. So, D.R. Horton’s sluggish order growth may be reflective of that event.

D.R. Horton believes that it is on the track to meet the housing demand in the all-important spring selling season as well as in fiscal 2016 on the back of encouraging sales trends in January, a healthy backlog, a steady lot supply and a strong inventory ready for sale. So, along with several other analysts, even we believe that moderate increases in prices along with job growth and improving consumer confidence should strengthen the operating backdrop of the housing sector going forward.

To add to this, rising rate concerns are not yet chasing us despite the Fed liftoff. Global growth worries have kept a lid on the bond yields and are favoring rate-sensitive sectors like housing (read: Short Rate-Sensitive Securities with These ETFs).

Thus, investors who believe that companies like D.R. Horton can establish a wining trend ahead can invest in housing ETFs like XHB and ITB. Investors can always go for a single stock pick, but a basket approach will safeguard them against stock-specific volatility that seems inherent of late.

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