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D.R. Horton (DHI) Looks Strong Going Into 2020: Here's Why

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D.R. Horton, Inc. (DHI - Free Report) has been exhibiting strong performance buoyed by robust backlog, a well-stocked inventory of land, lots and homes, along with favorable housing industry dynamics.

Notably, shares of D.R. Horton have gained 61.3%, outperforming the Zacks Building Products - Home Builders industry and S&P 500’s 52.2% and 24% rally, respectively,  so far this year. The price performance was backed by the company’s robust earnings surprise history, having surpassed the Zacks Consensus Estimate in six of the trailing eight quarters. Its revenues also surpassed the consensus mark in seven of the trailing eight quarters.

This Texas-based homebuilding company ended fiscal 2019 on a strong note. Earnings per share increased 13% and revenues grew 9.4% from a year ago. Notably, with 56,975 homes closed in fiscal 2019, D.R. Horton completed its 18th consecutive year as the largest homebuilder in the United States. In the fiscal year, homes closed increased 10% year over year to 56,975 units and 9% in value to $16.9 billion. Additionally, homebuilding cash flow from operations was $1.4 billion.

Will This Momentum Continue in 2020?

This Zacks Rank #2 (Buy) company remains well poised for fiscal 2020, courtesy of its industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots and homes, along with affordable product offerings across multiple brands. It expects to deliver an improved performance, given improving housing market fundamentals, favorable mortgage rates and a solid job market. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

D.R. Horton is fast acquiring homebuilding companies in desirable markets. Over the past five years (through fiscal 2019), the company has invested approximately $1 billion on acquisitions. Its strong cash position and low debt/capital ratio allowed it to make strategic land purchases even during the downturn, in turn giving D.R. Horton a significant competitive advantage. The company invested $3.7 billion in lots, land and development in fiscal 2019, and has plans to boost investments to replenish its land and lot supply in 2020 for supporting revenue growth. With 307,300 lots (40% owned and 60% controlled through option contracts) in inventory at the end of fiscal 2019, D.R. Horton is well poised for fiscal 2020.

The company continues to expect growth in the mid to high single-digit range for both revenues and homes closed. It expects revenues between $18.5 billion and $19 billion (indicating an increase from $17.59 billion in fiscal 2019), and homes closing within 60,000-61,000 (suggesting growth from 56,975 homes closed a year ago). Homebuilding cash flow from operations is projected to be in excess of $1 billion. The company intends to reduce share count by 2% in fiscal 2020.

The company strategically manages pricing, incentives and sales pace across the markets served in a manner that will optimize returns on inventory investments. It believes a consistent sales pace through inventory turnover is the best way to maximize profits and returns. The company’s homebuilding return on inventory (ROI) improved from 15.4% in fiscal 2016 to 16.6% and 20.2% in fiscal 2017 and 2018, respectively. In fiscal 2019, ROI was 18.1%.

The U.S. housing market started building up strength since the beginning of 2019. Declining mortgage rates and moderate home prices have been adding strength to D.R. Horton and other homebuilders like Meritage Homes Corporation (MTH - Free Report) , PulteGroup, Inc. (PHM - Free Report) , and NVR, Inc. (NVR - Free Report) . Declining interest/mortgage rates, lower construction costs, low unemployment and increasing wages are somewhat offsetting the other ongoing headwinds. The overall homebuilding industry remains positive owing to ongoing traffic trends that indicate higher inclination of buyers, thereby reflecting a slow but steady housing recovery.

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