The U.S. housing industry — which has so far been grappling with shortage of skilled labor, higher land costs and tariff-related woes — is expected to witness another phase of the coronavirus outbreak-induced instability. As the outbreak has taken the shape of a global crisis, material supply chain disruptions could impact construction sites and development pipelines.
Nonetheless, declining interest/mortgage rates, low unemployment and increasing wages are somewhat offsetting the prevailing headwinds. D.R. Horton, Inc. (DHI - Free Report) is among the homebuilding companies that remains relatively well positioned, courtesy of impressive performance, its industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots and homes, along with affordable product offerings across multiple brands.
Although the company’s shares have dropped 13.5% year to date amid growing panic over the coronavirus outbreak, earnings estimates for fiscal 2020 and 2021 have moved up 7.3% and 4.3%, respectively, over the past 60 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What Makes the Stock an Attractive Pick?
Solid Results: D.R. Horton has a robust earnings surprise history, having surpassed the Zacks Consensus Estimate in seven of the trailing nine quarters. Its revenues also surpassed the consensus mark in eight of the trailing nine quarters. It ended fiscal 2019 on a strong note. Earnings per share increased 10.6% and revenues grew 10.7% 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. The trend continued in fiscal first-quarter 2020 as well, with adjusted earnings and revenues increasing 30.3% and 14.3%, respectively.
D.R. Horton has solid prospects, as is evident from the Zacks Consensus Estimate for earnings for the current year of $5.27 per share, indicating 22.8% year-over-year improvement (higher than the industry’s 7.3% expected growth). The company’s revenues are also expected to increase 10% year over year in fiscal 2020.
Positive Housing Market Backdrop: Declining mortgage rates and moderate home prices have been adding strength to D.R. Horton and other homebuilders. 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. Notably, declining interest/mortgage rates, lower construction costs, low unemployment and increasing wages are somewhat offsetting the other ongoing headwinds. Moreover, as more and more millennials are leaving their parents’ home, a sharp spike in household formation is likely to translate into higher demand for new homes.
Expansion Spree: 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. The company invested $3.7 billion in lots, land and development in fiscal 2019, almost on par with the year-ago level of $3.8 billion. It invested $1.3 billion in lots, land and development during the fiscal first quarter. It has plans to boost investments to replenish its land and lot supply in fiscal 2020 for supporting revenue growth.
Superior ROE: D.R. Horton’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 16.9% compares favorably with the industry average of 12%, implying that it is efficient in using its shareholders’ funds.
Other Stocks to Consider
Other top-ranked stocks in the same space include M.D.C. Holdings, Inc. (MDC - Free Report) , PulteGroup, Inc. (PHM - Free Report) and TRI Pointe Group, Inc. (TPH - Free Report) , each sporting a Zacks Rank #1.
M.D.C. Holdings’ earnings for 2020 are likely to increase 17.2%.
PulteGroup’s 2020 earnings are likely to grow 18.3%.
TRI Pointe Group has three-five year expected EPS growth rate of 11%.
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