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D.R. Horton's (DHI) Backlog Solid, Material Costs Rise

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With robust backlog, a well-stocked inventory of land, lots and homes in place and accretive acquisitions, D.R. Horton (DHI - Free Report) is expected to continue its stellar performance through fiscal 2018. At the end of the second quarter of fiscal 2018, sales order backlog increased 8.4% to 15,841 homes. Backlog value increased 9% to $4.8 billion.

The company’s first-half performance was impressive with Homebuilding revenues increasing 15% and earnings rising 22.6%. Homes closed in the first six months of 2018 increased 15% to 23,069 homes compared with 20,089 homes closed in the same period of 2017.

Key Positives

Acquisitions have been an important growth driver for the company. The $558-million buyout of 75% shares of Forestar Group will help D.R. Horton to expand operations in Texas, which is witnessing positive housing momentum. It is expected to contribute around $1 billion in annual revenues over the next five years.

D.R. Horton’s inventory of land, plots and homes provide it a strong competitive position to meet rising demand in upcoming quarters. This is expected to boost sales and home closings. The company invested $3.5 billion in lots, land and development in fiscal 2017 compared with $2.7 billion a year ago. The company expects its homebuilding operations to invest approximately $4 billion in lots, land and development in fiscal 2018.

Moreover, the company’s cost-reduction measures have lowered SG&A expenses over the years. It strategically manages the pricing, incentives and sales pace across its markets, which will optimize the returns on inventory investments. In the first six months of fiscal 2018, SG&A expenses improved 30 basis points (bps) year over year to 9.1% and are expected to be around 8.7% for fiscal 2018.

Upbeat Outlook

The company raised consolidated revenue guidance in the range of $15.9-$16.3 billion from the prior expectation of $15.5-$16.3 billion. Homes closing are now expected to fall between 51,500 and 52,500 units (versus 50,500-52,500 units expected earlier). Homebuilding SG&A expenses, as a percentage of homebuilding revenues, are reaffirmed at around 8.7%.

D.R. Horton has updated home sales gross margin forecast to 20.5-21%. Consolidated pre-tax profit margin is now expected to be approximately 12.1-12.3% (compared with 11.8-12% expected earlier).

Major Hurdles

Rising building materials and labor costs are headwinds for the company’s margin. Land prices are inflating due to limited availability. This could eat into homebuilders’ margins in the forthcoming quarters. Moreover, the recently imposed tariff on imported steel and aluminum raises concern. An increase in import tariff will escalate raw material cost for home builders, who are already grappling with hiked cost, thanks to the recent imposition of lumber tariff. Home sales gross margin contracted 20 bps to 20% in fiscal 2017.

Again, high mortgage rates may dilute the demand for new homes. In March, the Federal Reserve raised federal funds rate by 0.25 percentage point. The target range for benchmark short-term interest rate is pegged between 1.5% and 1.75%. This was the sixth rate hike by the Fed since 2015. The Fed expects to increase interest rates two more times in 2018 and projects a median federal funds rate of 2.9% by the end of 2019 that indicates three hikes against the two estimated in the last Fed meeting in December 2017.

D.R. Horton, Inc. Price



Zacks Rank & Stocks to Consider

D.R. Horton carries a Zacks Rank #3 (Hold).

You can consider a few better-ranked stocks in the same space.

Lyon William Homes (WLH - Free Report) carries Zacks Rank #1(Strong Buy). Its earnings are expected to grow 40.7% this year. You can see the complete list of today’s Zacks #1 Rank  stocks here.

M.D.C. Holdings, Inc. (MDC - Free Report) , a Zack Rank #2 stock (Buy), is expected to witness 27.9% growth in earnings this year.

Meritage Corporation (MTH - Free Report) holds a Zack Rank #2. Its earnings are expected to grow 38.7% in 2018.

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