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Will Revival of Housing Market Benefit D.R. Horton (DHI)?

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D.R. Horton, Inc. (DHI - Free Report) is expected to benefit from industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots and homes, along with affordable product offerings across multiple brands.

Shares of this Texas-based homebuilder have returned 48% over the past three months, steadily outperforming the Zacks Building Products - Home Builders industry’s 46.8% rally. Also, it has outperformed the S&P 500’s 18% rise in the said period. The solid performance can be attributed to an impressive earnings surprise trend. D.R. Horton’s earnings surpassed the Zacks Consensus Estimate in seven of the trailing 10 quarters. Its revenues also surpassed the consensus mark in eight of the trailing 10 quarters. The trend is expected to continue in the near term as well, supported by solid fiscal 2019 and first-half fiscal 2020 results.

However, record job losses, and fear and uncertainty regarding the future as a result of the COVID-19 pandemic are concerns for homebuilders like D.R. Horton, KB Home (KBH - Free Report) , PulteGroup Inc. (PHM - Free Report) , NVR, Inc. (NVR - Free Report) and others.

Nonetheless, earnings estimates for 2020 have moved 1.5% north in the past 60 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #1 (Strong 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 stocks here.

Let us delve deeper into other factors that make this stock a profitable pick.

What Makes the Stock an Attractive Pick?

Focus on Affordable Homes: Higher building material costs, and land and labor shortages are prompting homebuilders to increase home prices. That said, D.R. Horton’s strategic shift toward more entry-level affordable homes have been paying off, with the segment experiencing strong demand and limited supply. Notably, first-time homebuyers represented 53% of its closings in second-quarter fiscal 2020.

Cost Reduction and Margin Improvement: Management has consistently made an effort to reduce both construction and selling, general and administrative (SG&A) expenses. It controls construction costs by efficiently designing homes, and obtaining construction materials and labor at competitive prices. Further, its SG&A expenses are continuously going down due to cost control and better fixed cost leverage. In fiscal first-half 2020, SG&A improved 50 basis points year over year.

Solid Returns: The company strategically manages pricing, incentives and sales pace across its markets in a manner that optimizes 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 return on equity was 19.1% in the trailing 12 months ended Mar 31, 2020 and homebuilding return on inventory was 20.2%. With 329,300 lots (36% were owned and 64% controlled through option contracts) in inventory at fiscal second quarter-end, D.R. Horton is well poised for fiscal 2020.

Rebounding Housing Market Scenario: Sales of new single-family homes in the United States saw a strong uptick in May, triggering hopes that COVID-19-induced housing slowdown might be coming to an end. Declining mortgage rates and unemployment level have been driving the U.S. housing industry in recent times. Overall, the U.S. housing market seems to be back on track, defying headwinds like low inventory levels, tight lending conditions, and the ongoing broad-based economic and public health risks associated with the pandemic. In fact, buyers are disregarding these impediments and the housing market seems to be well poised in the early weeks of summer. The better-than-expected jobs report and other recent economic data reflect a strong revival from pandemic-lows, pointing to a V-shaped recovery.

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