On Mar 28, we issued an updated research report on D.R. Horton, Inc. (DHI - Free Report) , one of the leading national homebuilders.
Positive Housing Market to Drive Growth
D.R. Horton is poised to gain traction on the current positive housing scenario. Steady job and wage growth, a recovering economy, moderating home price gains, historically low interest/mortgage rates, rising rentals, rapidly increasing household formation and a limited supply of inventory point to strong demand in 2017.
Moreover, D.R. Horton remains committed toward achieving continued double-digit annual growth in both revenues and pre-tax profits while generating positive cash flow and improved returns.
Management has consistently made efforts to reduce both construction and selling, general and administrative (SG&A) expenses. In fiscal 2016, homebuilding SG&A improved 20 basis points or bps to 9.3% from 9.5% in 2015, as higher revenues improved the leverage of its fixed overhead costs. For fiscal 2017, the company expects SG&A expenses to improve approximately 30 bps to around 9.0%.
Again, this Texas-based homebuilder strategically manages the pricing, incentives and sales pace across its markets in a manner that optimizes returns on inventory investments. It believes that a consistent sales pace through inventory turnover is the best way to maximize profits and returns. The company’s total home building pre-tax return on inventory has improved over the past three years from 5.5% in 2012 to 11.1% in 2014, 12.8% in 2015 and 15.4% in 2016. Management expects to make further improvement on this metric.
D.R. Horton’s shares have increased 21.8% year to date, outperforming the Zacks categorized Building-Residential/Commercial industry’s growth of 17.3%. Continued double-digit annual growth in both revenues and pre-tax profits should drive the stock’s performance in the upcoming quarters.
The company also has a 3–5 year earnings per share growth rate of 10.5%. This earnings momentum is likely to continue in the near term, as reflected by the company’s projected earnings per share growth of 15.8% for the current year and 9.3% for next year.
Like any other homebuilding company, such as Lennar Corp. (LEN - Free Report) , KB Home (KBH - Free Report) or PulteGroup Inc. (PHM - Free Report) , D.R. Horton is vulnerable to rising land and labor costs that are threatening margins as they limit homebuilders’ pricing power. Labor shortages are leading to higher wages while land prices are inflating due to limited availability. More inflation is anticipated, going ahead. This is denting homebuilders’ margins considering that home price increases are moderating.
Although we see limited impact on housing demand from the recent increase in mortgage rates, owing to labor market strength, its influence on the industry in 2017 is undeniable and uncertain. High mortgage rates dilute demand for new homes as mortgage loans become expensive. This lowers the purchasing power of buyers and hurts volumes, revenues and profits of homebuilders.
D.R. Horton currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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