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Here's Why Investors Should Retain D.R. Horton (DHI) Stock
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D.R. Horton Inc.’s (DHI - Free Report) shares have returned 26.6% in the past year, outperforming the industry’s 8.9% growth. Earnings estimates for the current and next year moved north in the past 60 days by 3.9% and 2.3%, respectively. This signifies that analysts are optimistic of the company’s future earnings growth, despite much apprehension about the impact of a rising interest rate scenario.
In the last reported quarter, D.R. Horton delivered yet another solid performance. Earnings and revenues surpassed the Zacks Consensus Estimate, courtesy of a solid housing market scenario. Homebuilding revenues increased 16% year over year on a 15% rise in home closings in the quarter. New orders rose 13% in units as well as value, increasing across all the operating regions.
Gross and pre-tax margins improved 100 basis points (bps) and 80 bps, respectively, in the quarter. The company reported earnings of 91 cents per share, higher than the year-ago profit level of 60 cents. Meanwhile, the company’s raised guidance on revenues, pre-tax margin and cash flow from operations for the year is equally encouraging.
Growth Drivers
With accretive acquisitions, robust backlog and cost-saving initiatives, D.R. Horton is expected to perform well in fiscal 2018. The Zacks Consensus Estimate for earnings for the current fiscal stands at $3.71 per share, which is expected to grow 35.4% year over year on 14.7% revenue growth.
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 expand its operations in Texas, which is currently witnessing positive housing momentum. It is also expected to contribute around $1 billion in annual revenues over the next five years.
This homebuilder’s quarter-end sales order backlog (under contract) increased 8.4% to 15,841 homes. Backlog value increased 9% to $4.8 billion. Meanwhile, the company has plans to boost investments for replenishing its land and lot supply in 2018 to support revenue growth. The company expects its homebuilding operations to invest approximately $4 billion in lots, land and development in fiscal 2018. This will surely give a major boost to its top line.
Separately, management has been making consistent efforts to reduce both construction and selling, as well as general and administrative (SG&A) expenses. It controls construction costs by designing homes efficiently, and also obtaining construction materials and labor at competitive prices. In the first six months of fiscal 2018, SG&A expenses improved 30 bps year over year to 9.1% and are expected to be around 8.7% for fiscal 2018.
Proficient cost management is expected to give a boost to the company’s margins. For fiscal 2018, D.R. Horton expects consolidated pre-tax margin to improve 70-90 bps to 12.1-12.3%.
The company believes that a consistent sales pace through inventory turnover is the best way to maximize profits and returns. In the trailing 12 months (as of Mar 31, 2018), D. R. Horton’s homebuilding return on inventory was 17.6%, depicting an improvement of 160 bps from 16% a year ago.
Headwinds
Rising material and labor costs, as well as competitive pricing pressure are major causes of concern.
Moreover, recently, the Federal Reserve hiked funds rate for the second time this year by a quarter percentage point to a range of 1.75-2%. Chances of two more rate hikes this year are also high. The rate hike was imminent, given stable economic scenario backed by low unemployment and solid wage growth. That said, the rise in interest rates comes at a time when home prices are increasing, owing to supply constraints and increased raw material costs.
Mortgage rates are surging in proportion to U.S. government bond yields, in anticipation of higher rates of inflation and further monetary tightening by the Fed. Rising mortgage rates may dilute the demand for new homes.
Though myriad problems have been decelerating the homebuilding industry of late, the larger picture is convincingly strong. Consumer demand is robust, courtesy of an improving economy, modest wage growth, low unemployment levels and positive consumer confidence.
Zacks Rank & Key Picks
Currently, D.R. Horton carries a Zacks Rank #3 (Hold).
Investors may consider some better-ranked stocks in the same space.
Meritage Corporation (MTH - Free Report) holds a Zack Rank #2 (Buy). Its earnings are expected to grow 42.5% in 2018.
Beazer Homes (BZH - Free Report) is also a Zacks Rank #2 stock and its earnings for the current quarter are expected to grow 78.3%.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
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Here's Why Investors Should Retain D.R. Horton (DHI) Stock
D.R. Horton Inc.’s (DHI - Free Report) shares have returned 26.6% in the past year, outperforming the industry’s 8.9% growth. Earnings estimates for the current and next year moved north in the past 60 days by 3.9% and 2.3%, respectively. This signifies that analysts are optimistic of the company’s future earnings growth, despite much apprehension about the impact of a rising interest rate scenario.
In the last reported quarter, D.R. Horton delivered yet another solid performance. Earnings and revenues surpassed the Zacks Consensus Estimate, courtesy of a solid housing market scenario. Homebuilding revenues increased 16% year over year on a 15% rise in home closings in the quarter. New orders rose 13% in units as well as value, increasing across all the operating regions.
Gross and pre-tax margins improved 100 basis points (bps) and 80 bps, respectively, in the quarter. The company reported earnings of 91 cents per share, higher than the year-ago profit level of 60 cents. Meanwhile, the company’s raised guidance on revenues, pre-tax margin and cash flow from operations for the year is equally encouraging.
Growth Drivers
With accretive acquisitions, robust backlog and cost-saving initiatives, D.R. Horton is expected to perform well in fiscal 2018. The Zacks Consensus Estimate for earnings for the current fiscal stands at $3.71 per share, which is expected to grow 35.4% year over year on 14.7% revenue growth.
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 expand its operations in Texas, which is currently witnessing positive housing momentum. It is also expected to contribute around $1 billion in annual revenues over the next five years.
This homebuilder’s quarter-end sales order backlog (under contract) increased 8.4% to 15,841 homes. Backlog value increased 9% to $4.8 billion. Meanwhile, the company has plans to boost investments for replenishing its land and lot supply in 2018 to support revenue growth. The company expects its homebuilding operations to invest approximately $4 billion in lots, land and development in fiscal 2018. This will surely give a major boost to its top line.
Separately, management has been making consistent efforts to reduce both construction and selling, as well as general and administrative (SG&A) expenses. It controls construction costs by designing homes efficiently, and also obtaining construction materials and labor at competitive prices. In the first six months of fiscal 2018, SG&A expenses improved 30 bps year over year to 9.1% and are expected to be around 8.7% for fiscal 2018.
Proficient cost management is expected to give a boost to the company’s margins. For fiscal 2018, D.R. Horton expects consolidated pre-tax margin to improve 70-90 bps to 12.1-12.3%.
The company believes that a consistent sales pace through inventory turnover is the best way to maximize profits and returns. In the trailing 12 months (as of Mar 31, 2018), D. R. Horton’s homebuilding return on inventory was 17.6%, depicting an improvement of 160 bps from 16% a year ago.
Headwinds
Rising material and labor costs, as well as competitive pricing pressure are major causes of concern.
Moreover, recently, the Federal Reserve hiked funds rate for the second time this year by a quarter percentage point to a range of 1.75-2%. Chances of two more rate hikes this year are also high. The rate hike was imminent, given stable economic scenario backed by low unemployment and solid wage growth. That said, the rise in interest rates comes at a time when home prices are increasing, owing to supply constraints and increased raw material costs.
Mortgage rates are surging in proportion to U.S. government bond yields, in anticipation of higher rates of inflation and further monetary tightening by the Fed. Rising mortgage rates may dilute the demand for new homes.
Though myriad problems have been decelerating the homebuilding industry of late, the larger picture is convincingly strong. Consumer demand is robust, courtesy of an improving economy, modest wage growth, low unemployment levels and positive consumer confidence.
Zacks Rank & Key Picks
Currently, D.R. Horton carries a Zacks Rank #3 (Hold).
Investors may consider some better-ranked stocks in the same space.
M.D.C. Holdings, Inc. sports a Zack Rank #1 (Strong Buy). Its earnings are expected to grow 33.3% in 2018. You can see the complete list of today’s Zacks #1 Rank stocks here.
Meritage Corporation (MTH - Free Report) holds a Zack Rank #2 (Buy). Its earnings are expected to grow 42.5% in 2018.
Beazer Homes (BZH - Free Report) is also a Zacks Rank #2 stock and its earnings for the current quarter are expected to grow 78.3%.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
See Them Free>>