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D.R. Horton Buys Classic Builders, Looks to Expand in Midwest

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D.R. Horton, Inc. (DHI - Free Report) has expanded its footprint in the Midwest of the United States with the acquisition of Classic Builders, one of the largest homebuilders in Des Moines, IA for $60 million.  

Terms of the Deal

With the addition of Classic Builders, D.R. Horton got possession of 670 lots, 130 homes in inventory along with 40 homes in sales order backlog. D.R. Horton also received control of 550 lots through option contracts. Classic Builders will be operated as a separate division under the D.R. Horton group.

Meanwhile, D.R. Horton, which has operations in 83 markets across 28 U.S. states will advantage from the expertise and well-established business of Classic Builders.

Over the 12 months ended Oct 31, Classic Builders closed 238 homes, with an average home size of about 1,650 square feet and price tag of $317,000.

Acquisitions the Key to Success

D.R. Horton is fast acquiring homebuilding companies in desirable markets. In the fiscal third quarter, the company took over two small private builders for approximately $18 million.

In October 2017, the company snapped up 75% shares of Forestar Group, a residential and mixed-use real estate development company, for $558 million. The deal helped D.R. Horton expand operations in Texas, which has been seeing a positive housing momentum of late. The deal is also expected to contribute around $1 billion to annual revenues of the company over the next five years.

D.R. Horton is focused on growing its top line and pre-tax profits at a double-digit pace annually, while generating higher annual operating cash flow and return.

In fact, in fiscal 2018, total revenues were $16.1 billion, up 14% year over year. Earnings of $3.81 per share in 2018 increased 41% year over year. The company completed 51,857 homes in the fiscal year, up 13% from fiscal 2017.

Moreover, its pre-tax income increased 29% to $2.1 billion. Pre-tax margin improved 140 basis points (bps) to 12.8% and homebuilding return on inventory was up 360 bps to 20.2%. Additionally, homebuilding cash flow from operations was $1 billion, marking a fourth straight year of positive operating cash flow generation.

However, factors like increasing land and labor costs, rising material costs and higher mortgage rates are major causes of concern.

Zacks Rank & Stocks to Consider

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

A few better top-ranked stocks in the Construction sector are Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , Altair Engineering Inc. (ALTR - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Great Lakes sports a Zacks Rank #1 (Strong Buy), Altair Engineering and EMCOR carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes’ 2018 earnings are expected to increase 111.1%.

Altair Engineering has an expected earnings growth rate of 23.1% for the current year.

EMCOR has a projected earnings growth rate of 20% for the current year.

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