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D.R. Horton (DHI) Soars 45% in 6 Months: More Upside in 2024?
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The scarcity of available existing homes for sale, coupled with a positive trend in mortgage rates and indications from the Federal Reserve suggesting a potential rate cut, indicates growing optimism in the homebuilding industry. In this environment, quality homebuilding stocks such as D.R. Horton (DHI - Free Report) may provide a safe haven. DHI’s stability and strong fundamentals position it well to withstand challenges within the industry.
D.R. Horton has been reaping the benefits of the abovementioned 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 this Arlington, TX-based homebuilder have rallied 45.1% over the past six months, outperforming the Zacks Building Products - Home Builders industry’s 41.2% rise. This Zacks Rank #3 (Hold) stock has a long-term earnings growth rate of 12.4%, which highlights its inherent strength. The growth prospect is further solidified with a VGM Score of B, backed by a Value Score of B.
Image Source: Zacks Investment Research
However, high SG&A expenses, rising land/labor and material costs and competitive pricing pressure remain concerns. The Zacks Consensus Estimate has witnessed a downtrend over the past 60 days as analysts lowered their estimates, depicting concerns over the stock’s growth potential. Over the said time frame, the Zacks Consensus Estimate for fiscal 2024 earnings per share (EPS) has decreased to $14.17 from $14.20.
Let’s delve into the driving factors.
Tailwinds
Improving Macro Scenario: The housing market is showing signs of strength, bolstered by a robust job market, limited availability of existing homes for sale and favorable mortgage rates. This positive trend is further supported by easing inflation and overall economic stability. The Federal Open Market Committee's recent decision to maintain the benchmark interest rate within a targeted range of 5.25%-5.5% provides a sense of stability for homebuilders.
On Mar 20, 2024, the Federal Reserve chose to keep its key interest rate unchanged for the fifth consecutive meeting, citing the need for additional data before considering any rate adjustments. While Fed officials grapple with the challenge of finding the right timing for potential actions, the majority still anticipate three rate cuts throughout 2024.
Strategic Acquisitions: D.R. Horton's growth strategy places significant emphasis on accretive acquisitions. The company has been swiftly acquiring homebuilding entities in sought-after markets. During the fiscal first quarter of 2024, there were no reported acquisitions.
In July 2023, D.R. Horton successfully acquired the homebuilding operations of Truland Homes, operating in Baldwin County, AL, and Northwest Florida, for an approximate sum of $100 million in cash. The acquired assets encompass around 155 homes in inventory, 620 lots and a sales order backlog of 55 homes. Additionally, the acquisition includes approximately 660 additional lots through land purchase contracts.
In the fiscal first quarter of 2024, the company’s homebuilding investments in lots, land and development for the quarter added up to $2.4 billion, up 3% sequentially and 41.2% year over year. The investments included $1.4 billion per finished lot, $740 million for land development and $270 million for land acquisition.
Affordable Homes: 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 about 56% of the company’s closings in the first quarter of fiscal 2024.
Furthermore, with an improvement in labor capacity and materials availability, cycle times are decreasing, which is allowing the company to release homes for sale earlier in the construction cycle. DHI is optimistic about moving into 2024 as it is positioned well to meet the changing market conditions with its affordable product offerings and lot supply based on the level of homebuyer demand. For the second quarter of fiscal 2024 and the full fiscal year, our model predicts net sales orders to grow 6.7% to 24,681 units and 13.8% to 89,166 units, respectively, year over year.
Headwind
Pressure on Margins: Escalating land and labor costs pose a threat to margins, constraining the pricing leverage of homebuilders. Labor shortages are resulting in increased wages, and limited availability is driving up land prices. Simultaneously, significant cost pressures from finished lots, skilled labor and rising material costs may impact margins across all key regions.
Also, homebuilders are offering incentives to stimulate sales, thereby increasing their operating expenses. In the fiscal first quarter of 2024, homebuilding SG&A expenses increased 14.5% to $603.4 million year over year, and homebuilding SG&A expenses, as a percentage of revenues, were 7.8%, up 50 bps from the prior-year period. The increase was primarily attributable to the expansion of the company’s operations to support growth, along with an increase in equity and stock market-based compensation expenses.
For the fiscal first quarter of 2024, the consolidated pre-tax profit margin contracted 140 bps to 16.1% compared to the prior-year period. The decline can be attributed to a 100 bps decrease in the home sales gross margin and a 50 bps increase in homebuilding SG&A expenses (as a percentage of revenues). For the fiscal second quarter of 2024, the company expects homebuilding SG&A expenses (as a percentage of revenues) between 7.5% and 7.7%, up from 7.3% reported in the year-ago quarter.
NVR delivered a trailing four-quarter earnings surprise of 8.1%, on average. The Zacks Consensus Estimate for NVR’s 2024 sales and earnings per share (EPS) indicates growth of 7.7% and 4.6%, respectively, from the prior-year levels.
Vulcan Materials Company (VMC - Free Report) currently sports a Zacks Rank of 1. The stock has advanced 35.4% in the past six months.
VMC delivered a trailing four-quarter earnings surprise of 19.5%, on average. The Zacks Consensus Estimate for VMC’s 2024 sales and EPS indicates an improvement of 1.4% and 19.4%, respectively, from a year ago.
Sterling Infrastructure, Inc. (STRL - Free Report) presently sports a Zacks Rank of 1. Shares of STRL have increased 53.1% in the past six months.
STRL has a trailing four-quarter earnings surprise of 20.4%, on average. The Zacks Consensus Estimate for STRL’s 2024 sales and EPS indicates a rise of 11.7% and 11.4%, respectively, from the prior-year levels.
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D.R. Horton (DHI) Soars 45% in 6 Months: More Upside in 2024?
The scarcity of available existing homes for sale, coupled with a positive trend in mortgage rates and indications from the Federal Reserve suggesting a potential rate cut, indicates growing optimism in the homebuilding industry. In this environment, quality homebuilding stocks such as D.R. Horton (DHI - Free Report) may provide a safe haven. DHI’s stability and strong fundamentals position it well to withstand challenges within the industry.
D.R. Horton has been reaping the benefits of the abovementioned 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 this Arlington, TX-based homebuilder have rallied 45.1% over the past six months, outperforming the Zacks Building Products - Home Builders industry’s 41.2% rise. This Zacks Rank #3 (Hold) stock has a long-term earnings growth rate of 12.4%, which highlights its inherent strength. The growth prospect is further solidified with a VGM Score of B, backed by a Value Score of B.
Image Source: Zacks Investment Research
However, high SG&A expenses, rising land/labor and material costs and competitive pricing pressure remain concerns. The Zacks Consensus Estimate has witnessed a downtrend over the past 60 days as analysts lowered their estimates, depicting concerns over the stock’s growth potential. Over the said time frame, the Zacks Consensus Estimate for fiscal 2024 earnings per share (EPS) has decreased to $14.17 from $14.20.
Let’s delve into the driving factors.
Tailwinds
Improving Macro Scenario: The housing market is showing signs of strength, bolstered by a robust job market, limited availability of existing homes for sale and favorable mortgage rates. This positive trend is further supported by easing inflation and overall economic stability. The Federal Open Market Committee's recent decision to maintain the benchmark interest rate within a targeted range of 5.25%-5.5% provides a sense of stability for homebuilders.
On Mar 20, 2024, the Federal Reserve chose to keep its key interest rate unchanged for the fifth consecutive meeting, citing the need for additional data before considering any rate adjustments. While Fed officials grapple with the challenge of finding the right timing for potential actions, the majority still anticipate three rate cuts throughout 2024.
Strategic Acquisitions: D.R. Horton's growth strategy places significant emphasis on accretive acquisitions. The company has been swiftly acquiring homebuilding entities in sought-after markets. During the fiscal first quarter of 2024, there were no reported acquisitions.
In July 2023, D.R. Horton successfully acquired the homebuilding operations of Truland Homes, operating in Baldwin County, AL, and Northwest Florida, for an approximate sum of $100 million in cash. The acquired assets encompass around 155 homes in inventory, 620 lots and a sales order backlog of 55 homes. Additionally, the acquisition includes approximately 660 additional lots through land purchase contracts.
In the fiscal first quarter of 2024, the company’s homebuilding investments in lots, land and development for the quarter added up to $2.4 billion, up 3% sequentially and 41.2% year over year. The investments included $1.4 billion per finished lot, $740 million for land development and $270 million for land acquisition.
Affordable Homes: 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 about 56% of the company’s closings in the first quarter of fiscal 2024.
Furthermore, with an improvement in labor capacity and materials availability, cycle times are decreasing, which is allowing the company to release homes for sale earlier in the construction cycle. DHI is optimistic about moving into 2024 as it is positioned well to meet the changing market conditions with its affordable product offerings and lot supply based on the level of homebuyer demand. For the second quarter of fiscal 2024 and the full fiscal year, our model predicts net sales orders to grow 6.7% to 24,681 units and 13.8% to 89,166 units, respectively, year over year.
Headwind
Pressure on Margins: Escalating land and labor costs pose a threat to margins, constraining the pricing leverage of homebuilders. Labor shortages are resulting in increased wages, and limited availability is driving up land prices. Simultaneously, significant cost pressures from finished lots, skilled labor and rising material costs may impact margins across all key regions.
Also, homebuilders are offering incentives to stimulate sales, thereby increasing their operating expenses. In the fiscal first quarter of 2024, homebuilding SG&A expenses increased 14.5% to $603.4 million year over year, and homebuilding SG&A expenses, as a percentage of revenues, were 7.8%, up 50 bps from the prior-year period. The increase was primarily attributable to the expansion of the company’s operations to support growth, along with an increase in equity and stock market-based compensation expenses.
For the fiscal first quarter of 2024, the consolidated pre-tax profit margin contracted 140 bps to 16.1% compared to the prior-year period. The decline can be attributed to a 100 bps decrease in the home sales gross margin and a 50 bps increase in homebuilding SG&A expenses (as a percentage of revenues). For the fiscal second quarter of 2024, the company expects homebuilding SG&A expenses (as a percentage of revenues) between 7.5% and 7.7%, up from 7.3% reported in the year-ago quarter.
Better-Ranked Stocks From the Construction Sector
NVR, Inc. (NVR - Free Report) currently sports a Zacks Rank #1 (Strong Buy). The stock has rallied 33.5% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
NVR delivered a trailing four-quarter earnings surprise of 8.1%, on average. The Zacks Consensus Estimate for NVR’s 2024 sales and earnings per share (EPS) indicates growth of 7.7% and 4.6%, respectively, from the prior-year levels.
Vulcan Materials Company (VMC - Free Report) currently sports a Zacks Rank of 1. The stock has advanced 35.4% in the past six months.
VMC delivered a trailing four-quarter earnings surprise of 19.5%, on average. The Zacks Consensus Estimate for VMC’s 2024 sales and EPS indicates an improvement of 1.4% and 19.4%, respectively, from a year ago.
Sterling Infrastructure, Inc. (STRL - Free Report) presently sports a Zacks Rank of 1. Shares of STRL have increased 53.1% in the past six months.
STRL has a trailing four-quarter earnings surprise of 20.4%, on average. The Zacks Consensus Estimate for STRL’s 2024 sales and EPS indicates a rise of 11.7% and 11.4%, respectively, from the prior-year levels.