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D.R. Horton Solid Fundamentals to Tide Over Coronavirus Woes

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D.R. Horton, Inc. (DHI - Free Report) is expected to benefit from industry-leading market share, a broad geographic footprint and affordable product offerings across multiple brands.

The company’s shares have gained more than 23% over a month, outperforming the Zacks Building Products - Home Builders industry’s 20% rally. The price performance was backed by D.R. Horton’s robust earnings surprise history, having surpassed the Zacks Consensus Estimate in seven of the trailing 10 quarters. Its revenues surpassed the consensus mark in eight of the trailing 10 quarters.

However, the alarming level of the COVID-19 pandemic spread has somewhat stalled the housing market and poses a risk in the near term as well. Let us analyze whether this homebuilding company will be able to sustain momentum amid this pandemic.

Relatively Low Exposure to COVID-19-Hit Areas

D.R. Horton has a relatively low exposure to areas that are not allowing residential construction. During first-quarter earnings conference call, it deemed residential construction in Washington state, the San Francisco Bay area, New Jersey and Pennsylvania to be a non-essential activity. According to the company, these areas represented approximately 4% of fiscal 2019’s unit closings.

Accretive Acquisitions in Desirable Markets

In this unprecedented scenario, D.R. Horton has stopped new acquisitions, and deferred construction and other projects until it gets a clearer visibility into market conditions. That said, acquisitions have been an important part of D.R. Horton’s growth strategy. Over the past five years (through fiscal 2019), the company has invested approximately $1 billion on acquisitions. It has selectively invested in attractively-priced land and lots in the past few years, which allowed it to bring new attractive communities in desirable markets. D.R. Horton’s well-stocked supply of land, plots and homes provide it with a strong competitive position to meet the demand in the coming quarters, in turn increasing sales and home closings.

Overall, order backlog of homes at fiscal second quarter-end was 19,328 homes, up 14% year over year. The value of backlogs was also up 18% from the prior year to $5.9 billion.

Shift Toward Affordable Homes

Coronavirus woes, and imminent recession and layoffs resulting from the same are anticipated to dent the housing market — which includes notable names like D.R. Horton, Lennar (LEN - Free Report) , PulteGroup (PHM - Free Report) and KB Home (KBH - Free Report) — in the near term.

In this volatile scenario, affordability is inevitably an eminent issue for homebuyers. That said, D.R. Horton’s strategic shift toward more entry-level affordable homes has been paying off, as is evident from the segment’s strong demand and limited supply. Notably, first-time homebuyers represented 53% of its closings in second-quarter fiscal 2020.

Ample Liquidity

Ample liquidity and a low leverage profile will help D.R. Horton to tide over the unfavorable demand trends owing to the pandemic. The company, currently carrying a Zacks Rank #3 (Hold), ended the fiscal second quarter with $1 billion of unrestricted homebuilding cash and $1 billion of available capacity on the $1.6-billion revolving credit facility, which resulted in total homebuilding liquidity of $2 billion. Its homebuilding debt (i.e. homebuilding notes payable) totaled $2.48 billion on Mar 31, 2020 (versus $2.47 billion as of Dec 31, 2019), with $400 million of senior note maturities in the next 12 months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hurdles to Cross

The recent economic slowdown resulting from shutdowns due to the coronavirus outbreak is a concern. The company's new orders for the month of April were down 11%, as of Apr 28. That said, as the last two weeks of April were stronger than the preceding four weeks, it can be said that D.R. Horton is seeing signs of stabilization, if not improvement.

The company has withdrawn its full-year guidance due to significant uncertainty surrounding the economic impact and duration of COVID-19. Also, the COVID-19 outbreak and Cares Act Forbearance measures are disrupting the mortgage market. As a result, D.R. Horton experienced lower pricing and sales gains on the sale of mortgage loans and servicing rights in the secondary market in late March, stretching into April. The company suggests that purchasers and servicers of mortgages have become risk adverse, and have limited purchases and tightened credit standards due to liquidity and operational challenges caused by COVID-19, and the forbearance measures.

Nonetheless, many economists are of the opinion that when the worst of the COVID-19 economic downturn is behind us, the housing market is expected to rebound, which might aid in bringing the rest of the economy out of the doldrums.

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