Undeniably, there have been indications that the thriving housing market is losing steam of late. Sales of new U.S. single-family homes fell to an eight-month low in June and data for May was revised sharply lower. Again, in June, housing inventories rose for the first time in three years. Average selling prices of new homes have also started to slow down from the prior quarters, even though labor and materials costs are still on the rise.
Despite these headwinds, homebuilder D.R. Horton, Inc. (DHI - Free Report) is one such company that continues to show strength in several areas and has managed to navigate smoothly. Shares of D.R. Horton have returned 24.7% in the past year, steadily outperforming the industry’s 3.1% growth. Earnings estimates for the current and next fiscal have moved north in the past 30 days by 4% and 4.8%, respectively. This signifies that analysts are optimistic of the company’s future earnings growth, despite much apprehension surrounding the impact of a rising interest rate scenario and other ongoing headwinds.
Let us delve deeper into the other factors that make this Zacks Rank #1 (Strong Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank stocks here.
What Makes the Stock an Attractive Pick?
Stellar Performance & Upbeat View: D.R. Horton exhibited stellar performance in the first nine months of fiscal 2018, courtesy of a solid housing market scenario. Homebuilding revenues increased 16.1% year over year on a 14.1% rise in home closings. Net sales orders rose 13.7% in units and 13.9% in value.
The company has been consistently making efforts to reduce both construction and selling, as well as general and administrative (SG&A) expenses. For instance, both gross and pre-tax margins improved 210 basis points year over year in the fiscal third quarter. With an impressive backlog ($4.98 billion as of Jun 30, 2018), along with a well-stocked supply of land, lots and homes, D.R. Horton is well positioned for fiscal 2018 as well as 2019.
The improvement was led by the company’s strength in its diverse product offerings from an array of brands and solid housing market conditions across its broad national footprint. The company remains focused on consistently growing its top line and pre-tax profits at a double-digit pace annually, while generating higher annual operating cash flow and returns.
Meanwhile, the company’s raised guidance for 2018 revenues and pre-tax margin is encouraging. It increased the lower end of the previous guided range for its consolidated revenues to the range of $16.1-$16.3 billion from prior expectation of $15.9-$16.3 billion. Consolidated pre-tax profit margin is now expected to be approximately 12.7-12.9% (compared with 12.1-12.3% expected earlier).
Solid Growth Prospects: D.R. Horton has solid growth prospects, as is evident from the Zacks Consensus Estimate for its current-year earnings of $3.88 per share, which is expected to grow 41.6% year over year. Meanwhile, the company’s revenues are expected to increase by an impressive 15.3% in fiscal 2018. Moreover, its earnings and revenues are expected to increase 18.3% and 11.3% in fiscal 2019, respectively.
Overall, the company constitutes a great pick in terms of growth investment, supported by a Growth Score of A.
Solid VGM Score: The company has an impressive VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 (Buy) make solid investment choices.
Superior ROE: D.R. Horton’s return on equity (ROE) supports its growth potential. Its ROE of 17.2% compares favorably with the industry’s average of 12.6%, implying that it is efficient in using its shareholders’ funds.
Other Stocks to Consider
Other top-ranked stocks in the same space include Lennar Corporation (LEN - Free Report) , M.D.C. Holdings, Inc. (MDC - Free Report) , and Meritage Homes Corporation (MTH - Free Report) , each carrying a Zacks Rank #2.
Lennar’s earnings for the current year are likely to increase 37.5%.
M.D.C. Holdings’ 2018 earnings are likely to increase 46.9%.
Meritage Homes’ earnings are expected to grow 46.1% for the year.
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