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D.R. Horton Hits 52-Week High: Can Rate-Cut Buzz Lift the Stock?
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D.R. Horton, Inc. (DHI - Free Report) shares crafted a new 52-week high of $193.63 on Aug. 6, 2024. The stock pulled back to end the trading session at $189.06.
Homebuilder stocks such as KB Home (KBH - Free Report) , PulteGroup, Inc. (PHM - Free Report) and Lennar Corporation (LEN - Free Report) reached 52-week highs on Aug. 26, following Federal Reserve Chair Jerome Powell's clear signal to financial markets that the time for lower interest rates has arrived. While Powell suggested that rate cuts are on the horizon, the extent of these cuts is still uncertain.
Among the prominent names in the homebuilding industry, D.R. Horton — the Arlington, TX-based company — has been reaping the benefits of its improved construction cycle times, industry-leading market share, solid acquisition strategy, broad geographic footprint and diverse product offerings across multiple brands and price points.
In the past three months, DHI has seen its shares rise steadily, growing as much as 32.4% compared with the Zacks Building Products - Home Builders industry’s rise of 24.1%. The stock has fared better than the Zacks Construction sector and the S&P 500 Index’s 9.6% and 5.8% rallies, respectively.
DHI’s 3-Month Price Performance
Image Source: Zacks Investment Research
DHI Stock Trades Above 50 and 200-Day Moving Averages
DHI currently trades above the 50-day and 200-day simple moving averages.
Image Source: Zacks Investment Research
With DHI’s stock price experiencing a significant surge, investors face a crucial decision: should they buy, hold or sell their shares now?
Let's Delve Into the DHI Stock's Underlying Fundamentals
Improved Construction Cycle Times of D.R. Horton
In the third quarter of fiscal 2024, D.R. Horton's average construction cycle times have improved and are back to normal levels, even slightly below their historical averages. This improvement in cycle times has been a contributing factor to more efficient housing inventory management and faster housing turns, allowing the company to manage its homes and inventory more effectively. The improved cycle times allow for quicker sales and inventory turnover, which can lead to better financial performance.
D.R. Horton has significantly expanded its market share in the U.S. housing market. The company closed 94,255 homes in the TTM ending June 30, 2024 compared to 90,777 in 2023. The number of homes closed has grown substantially over the years, from 1,231 homes in 1992 to 90,777 homes in 2023, illustrating long-term growth. D.R. Horton is the largest homebuilder in three of the top five U.S. housing markets — Dallas-Fort Worth (DFW), Houston and Austin. This dominance underscores the company’s strong competitive positioning in highly populated and fast-growing areas.
D.R. Horton caters to a wide range of buyers, including entry-level, move-up, active adult and luxury segments. This diversification allows the company to capture a broad customer base. Again, the company’s focus on affordability is evident as 69% of the homes closed in the past year were priced below $400,000. This strategy not only broadens the potential customer base but also positions DHI well in the face of economic uncertainties where affordability becomes a key consideration for buyers.
Boost in DHI’s Capital Return Momentum
During the fiscal third-quarter earnings call, D.R. Horton emphasizes its strong cash flow position, driven by improved operational efficiency, particularly through reduced construction cycle times and better inventory management. Over the past five fiscal years, D.R. Horton has demonstrated strong cash flow generation from its homebuilding operations, with a total of $9.6 billion accumulated between fiscal 2019 and fiscal 2023. The cash flow figures reveal a steady growth trajectory, starting at $1,453 million in fiscal 2019 and peaking at $3,078 million in fiscal 2023.
D.R. Horton has strategically allocated this cash flow across several key areas, reflecting its commitment to enhancing shareholder value and strengthening its financial position. Of the $9.6 billion in cash flow, $5.4 billion — approximately 60% — has been returned to shareholders through dividends and share repurchases. This substantial return of capital underscores the company's focus on rewarding its investors. Additionally, $2.1 billion has been directed toward reducing homebuilding debt and increasing liquidity, further solidifying the company's financial stability.
In terms of growth initiatives, D.R. Horton has invested $1.3 billion in rental operations, aligning with the growing demand for rental properties. The company has also allocated $0.8 billion toward acquisitions, which likely supports its expansion and diversification efforts. D.R. Horton anticipates an increase in the return of capital to shareholders in fiscal 2025 and beyond, signaling confidence in its ongoing financial performance and operational success.
DHI’s Accretive Acquisitions & Higher Land Investment
The company's acquisition strategy is focused on small, strategic "tuck-in" acquisitions. These acquisitions are intended to expand D.R. Horton’s footprint in emerging geographies or enhance its existing operations in key markets. In July 2023, the company acquired the homebuilding operations of Truland Homes, which operates in Baldwin County, Alabama and Northwest Florida, for approximately $100 million in cash. The acquired assets include nearly about 155 homes in inventory, 620 lots and a sales order backlog of 55 homes, along with approximately 660 additional lots through land purchase contracts.
The company prefers to acquire businesses that come with both a strong lot position and experienced personnel. Additionally, D.R. Horton often works with the selling principals to transition them into lot entitlement and development roles, which supports ongoing growth and strengthens relationships with local land development partners.
In the third quarter of fiscal 2024, the company’s homebuilding investments in lots, land and development added up to $2.5 billion, up 4.2% sequentially and 13.6% year over year, respectively. The investments included $1.4 billion per finished lot, $750 million for land development and $340 million for land acquisition. During the fiscal third quarter, the average number of active selling communities increased 3% sequentially and 12% year over year, respectively.
What May Pull Back D.R. Horton?
Volatile Market Conditions for DHI
From the industry perspective, high borrowing costs are currently hindering home sales and builder sentiment, creating a challenging environment for housing investments. Affordability issues, driven by high inflation and mortgage rates, limit the potential for higher sales growth.
The declining backlog of orders — a leading indicator of future revenue — further suggests that DHI may continue to face revenue pressures in the coming quarters. D.R. Horton witnessed a 12% year-over-year decline in the order backlog to 16,792 homes at the end of the fiscal third quarter. Moreover, the value of the backlog was down 12% from the prior year to $6.6 billion.
The Federal Reserve may reduce interest rates later this year, potentially stimulating housing demand. However, the timing and scale of these possible rate cuts are unclear. Without a noticeable and significant decline in interest rates, a major recovery in housing demand appears unlikely. This uncertainty introduces an additional risk for investors considering an investment in DHI.
D.R. Horton’s Cost Pressures
Continued elevated incentives necessary to address affordability, affecting gross margins despite improvements. Homebuilding SG&A expenses increased by 12% year over year in the last reported quarter, reflecting the expansion of operations and potentially squeezing profit margins.
Increasing lot costs, which rose by 2.5% sequentially and continued to be a headwind, impacting overall profitability. While stick and brick costs have stabilized, lot costs continue to rise, and the overall cost environment remains uncertain, particularly if demand pressures lead to increased incentives.
DHI Stock Looks Pricey
DHI stock is trading at a premium, with a forward 12-month P/E of 12.4X compared with the industry’s 11.8X and higher than the median of 9.9X, reflecting a stretched valuation.
Image Source: Zacks Investment Research
Downward Estimate Revision Trend for DHI
Analysts are showing reduced confidence in the stock, as indicated by recent downward revisions in earnings estimates. Over the last 30 days, forecasts for the current quarter and fiscal 2024 have declined to $4.14 (from $4.16) and to $14.03 (from $14.04), respectively. However, the Zacks Consensus Estimate for DHI’s fiscal 2025 earnings per share has risen to $15.39 from $15.37 in the last 30 days, indicating analysts’ increasing confidence in the stock for the next year.
Image Source: Zacks Investment Research
Investment Thought for DHI: Hold or Fold?
D.R. Horton is well-positioned due to its strong acquisition strategies, expanding homebuilding lots, reduced cycle times, and a diverse range of product offerings across multiple brands and price points.
While DHI has recently hit new highs in its stock performance, prospective investors should exercise caution. The Federal Reserve is expected to begin lowering interest rates in September in response to declining inflation and a cooling job market. Although these cuts might be viewed positively, they are unlikely to have an immediate, significant impact on businesses.
While small reductions in the federal funds rate are expected in the future, they are unlikely to drastically change loan repayment terms or significantly boost the housing market in the short term. Given the stock's high valuation in a challenging macroeconomic environment, downward revisions in EPS estimates and cost pressures, current stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock. Potential new investors might consider waiting for more clarity on how DHI handles these challenges and navigates the broader economic landscape before making new investment decisions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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D.R. Horton Hits 52-Week High: Can Rate-Cut Buzz Lift the Stock?
D.R. Horton, Inc. (DHI - Free Report) shares crafted a new 52-week high of $193.63 on Aug. 6, 2024. The stock pulled back to end the trading session at $189.06.
Homebuilder stocks such as KB Home (KBH - Free Report) , PulteGroup, Inc. (PHM - Free Report) and Lennar Corporation (LEN - Free Report) reached 52-week highs on Aug. 26, following Federal Reserve Chair Jerome Powell's clear signal to financial markets that the time for lower interest rates has arrived. While Powell suggested that rate cuts are on the horizon, the extent of these cuts is still uncertain.
Among the prominent names in the homebuilding industry, D.R. Horton — the Arlington, TX-based company — has been reaping the benefits of its improved construction cycle times, industry-leading market share, solid acquisition strategy, broad geographic footprint and diverse product offerings across multiple brands and price points.
In the past three months, DHI has seen its shares rise steadily, growing as much as 32.4% compared with the Zacks Building Products - Home Builders industry’s rise of 24.1%. The stock has fared better than the Zacks Construction sector and the S&P 500 Index’s 9.6% and 5.8% rallies, respectively.
DHI’s 3-Month Price Performance
Image Source: Zacks Investment Research
DHI Stock Trades Above 50 and 200-Day Moving Averages
DHI currently trades above the 50-day and 200-day simple moving averages.
Image Source: Zacks Investment Research
With DHI’s stock price experiencing a significant surge, investors face a crucial decision: should they buy, hold or sell their shares now?
Let's Delve Into the DHI Stock's Underlying Fundamentals
Improved Construction Cycle Times of D.R. Horton
In the third quarter of fiscal 2024, D.R. Horton's average construction cycle times have improved and are back to normal levels, even slightly below their historical averages. This improvement in cycle times has been a contributing factor to more efficient housing inventory management and faster housing turns, allowing the company to manage its homes and inventory more effectively. The improved cycle times allow for quicker sales and inventory turnover, which can lead to better financial performance.
DHI’s Growth & Market Share, Product Diversification
D.R. Horton has significantly expanded its market share in the U.S. housing market. The company closed 94,255 homes in the TTM ending June 30, 2024 compared to 90,777 in 2023. The number of homes closed has grown substantially over the years, from 1,231 homes in 1992 to 90,777 homes in 2023, illustrating long-term growth. D.R. Horton is the largest homebuilder in three of the top five U.S. housing markets — Dallas-Fort Worth (DFW), Houston and Austin. This dominance underscores the company’s strong competitive positioning in highly populated and fast-growing areas.
D.R. Horton caters to a wide range of buyers, including entry-level, move-up, active adult and luxury segments. This diversification allows the company to capture a broad customer base. Again, the company’s focus on affordability is evident as 69% of the homes closed in the past year were priced below $400,000. This strategy not only broadens the potential customer base but also positions DHI well in the face of economic uncertainties where affordability becomes a key consideration for buyers.
Boost in DHI’s Capital Return Momentum
During the fiscal third-quarter earnings call, D.R. Horton emphasizes its strong cash flow position, driven by improved operational efficiency, particularly through reduced construction cycle times and better inventory management. Over the past five fiscal years, D.R. Horton has demonstrated strong cash flow generation from its homebuilding operations, with a total of $9.6 billion accumulated between fiscal 2019 and fiscal 2023. The cash flow figures reveal a steady growth trajectory, starting at $1,453 million in fiscal 2019 and peaking at $3,078 million in fiscal 2023.
D.R. Horton has strategically allocated this cash flow across several key areas, reflecting its commitment to enhancing shareholder value and strengthening its financial position. Of the $9.6 billion in cash flow, $5.4 billion — approximately 60% — has been returned to shareholders through dividends and share repurchases. This substantial return of capital underscores the company's focus on rewarding its investors. Additionally, $2.1 billion has been directed toward reducing homebuilding debt and increasing liquidity, further solidifying the company's financial stability.
In terms of growth initiatives, D.R. Horton has invested $1.3 billion in rental operations, aligning with the growing demand for rental properties. The company has also allocated $0.8 billion toward acquisitions, which likely supports its expansion and diversification efforts. D.R. Horton anticipates an increase in the return of capital to shareholders in fiscal 2025 and beyond, signaling confidence in its ongoing financial performance and operational success.
DHI’s Accretive Acquisitions & Higher Land Investment
The company's acquisition strategy is focused on small, strategic "tuck-in" acquisitions. These acquisitions are intended to expand D.R. Horton’s footprint in emerging geographies or enhance its existing operations in key markets. In July 2023, the company acquired the homebuilding operations of Truland Homes, which operates in Baldwin County, Alabama and Northwest Florida, for approximately $100 million in cash. The acquired assets include nearly about 155 homes in inventory, 620 lots and a sales order backlog of 55 homes, along with approximately 660 additional lots through land purchase contracts.
The company prefers to acquire businesses that come with both a strong lot position and experienced personnel. Additionally, D.R. Horton often works with the selling principals to transition them into lot entitlement and development roles, which supports ongoing growth and strengthens relationships with local land development partners.
In the third quarter of fiscal 2024, the company’s homebuilding investments in lots, land and development added up to $2.5 billion, up 4.2% sequentially and 13.6% year over year, respectively. The investments included $1.4 billion per finished lot, $750 million for land development and $340 million for land acquisition. During the fiscal third quarter, the average number of active selling communities increased 3% sequentially and 12% year over year, respectively.
What May Pull Back D.R. Horton?
Volatile Market Conditions for DHI
From the industry perspective, high borrowing costs are currently hindering home sales and builder sentiment, creating a challenging environment for housing investments. Affordability issues, driven by high inflation and mortgage rates, limit the potential for higher sales growth.
The declining backlog of orders — a leading indicator of future revenue — further suggests that DHI may continue to face revenue pressures in the coming quarters. D.R. Horton witnessed a 12% year-over-year decline in the order backlog to 16,792 homes at the end of the fiscal third quarter. Moreover, the value of the backlog was down 12% from the prior year to $6.6 billion.
The Federal Reserve may reduce interest rates later this year, potentially stimulating housing demand. However, the timing and scale of these possible rate cuts are unclear. Without a noticeable and significant decline in interest rates, a major recovery in housing demand appears unlikely. This uncertainty introduces an additional risk for investors considering an investment in DHI.
D.R. Horton’s Cost Pressures
Continued elevated incentives necessary to address affordability, affecting gross margins despite improvements. Homebuilding SG&A expenses increased by 12% year over year in the last reported quarter, reflecting the expansion of operations and potentially squeezing profit margins.
Increasing lot costs, which rose by 2.5% sequentially and continued to be a headwind, impacting overall profitability. While stick and brick costs have stabilized, lot costs continue to rise, and the overall cost environment remains uncertain, particularly if demand pressures lead to increased incentives.
DHI Stock Looks Pricey
DHI stock is trading at a premium, with a forward 12-month P/E of 12.4X compared with the industry’s 11.8X and higher than the median of 9.9X, reflecting a stretched valuation.
Image Source: Zacks Investment Research
Downward Estimate Revision Trend for DHI
Analysts are showing reduced confidence in the stock, as indicated by recent downward revisions in earnings estimates. Over the last 30 days, forecasts for the current quarter and fiscal 2024 have declined to $4.14 (from $4.16) and to $14.03 (from $14.04), respectively. However, the Zacks Consensus Estimate for DHI’s fiscal 2025 earnings per share has risen to $15.39 from $15.37 in the last 30 days, indicating analysts’ increasing confidence in the stock for the next year.
Image Source: Zacks Investment Research
Investment Thought for DHI: Hold or Fold?
D.R. Horton is well-positioned due to its strong acquisition strategies, expanding homebuilding lots, reduced cycle times, and a diverse range of product offerings across multiple brands and price points.
While DHI has recently hit new highs in its stock performance, prospective investors should exercise caution. The Federal Reserve is expected to begin lowering interest rates in September in response to declining inflation and a cooling job market. Although these cuts might be viewed positively, they are unlikely to have an immediate, significant impact on businesses.
While small reductions in the federal funds rate are expected in the future, they are unlikely to drastically change loan repayment terms or significantly boost the housing market in the short term. Given the stock's high valuation in a challenging macroeconomic environment, downward revisions in EPS estimates and cost pressures, current stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock. Potential new investors might consider waiting for more clarity on how DHI handles these challenges and navigates the broader economic landscape before making new investment decisions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.