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DHI Beats But Housing ETFs Tumble: Why?

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D.R. Horton (DHI - Free Report) , one of the biggest and well-known homebuilders in the nation, came up with upbeat fiscal third-quarter 2017 results on July 26 before the bell. Both earnings and revenues beat the Zacks Consensus Estimate (read: Is Spring Selling Season Opening Room for Housing ETFs?).

However, its slowest order growth in three quarters diluted the impact of the earnings beat. Along with this, easing momentum in the U.S. new home sales segment made matters worse. Shares fell about 1.9% post earnings release.

Let’s take a look inside the headline numbers:

The company reported earnings of $0.76 per share, beating the Zacks Consensus Estimate of $0.75. Earnings grew 15.2% year over year driven by higher home sales. Total revenue (homebuilding and financial services) of $3.78 billion beat the Zacks Consensus Estimate of $3.71 billion by 5.2%. Total revenue also increased 16.8% year over year (read: Sector ETFs & Stocks to Tap Q2 Earnings Growth).

Homebuilding revenues of $3.68 billion increased 17% year over year, helped by higher home deliveries. The company registered growth across all the regions comprising East, Midwest, Southeast, South Central, Southwest and West.

Inside Home Sales in June

New U.S. single-family home sales rose for the second successive month in June with purchases in the West skyrocketing to about a 10-year high. However, downward revisions to sales growth for the previous three months hinted at cooling of the housing market.

May's sales pace was cut down to 605,000 units from the previously reported 610,000 units while June recorded a 0.8% increase to a seasonally adjusted annual rate of 610,000 units. With this, sales in June missed economists’ prediction of 1.4% growth to 615,000 units.

To add to the woes, homebuilder confidence plunged to an eight-month low in July, indicating no meaningful recovery in the already under-pressure home inventory market. If this was not enough, existing home sales fell more than expected in June on less availability of properties that shot up prices.

Market & ETF Impact

The subtle bearishness over such an important homebuilding stock may cause a slack in housing ETFs over the coming days. Overall improvement of the housing sector also seems to be rocky as evident from home sales data (read: Rate Sensitive ETFs in Focus as Fed Meets).

However, the Fed remained dovish and yields are on the lower side at the current level. This may work wonder for the sector. Investors should also note that the sector is well positioned from the Zacks Rank point of view. The Zacks Industry Rank of DHI is in the top 8% at the time of writing and the Zacks Sector Rank is in the top 25% (read: Foreign Investment in U.S. Housing Surges: ETFs to Buy).

Housing ETFs mainly include SPDR S&P Homebuilders ETF (XHB - Free Report) and iShares U.S. Home Construction ETF (ITB - Free Report) . DHI takes first spot in the 45-stock ITB with a 12.41% weight and the first position in the 37-stock XHB with 4.87% exposure.

In a nutshell, investors who want to bet on the Fed’s dovishness but worried about dull order growth at D.R. Horton, may easily take the ETF route for investing. This is because a basket approach always safeguards investors from stock-specific volatility. ITB was down about 0.8% on July 26, while XHB was down about 0.03%.

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