Key points
- DR Horton posted another solid quarter and led the market higher for 2024.
- The lag grows sequentially and supports accelerated growth: all they have to do is build the houses.
- Dividends, share repurchases, increased equity, and increased book value will help take this stock to new highs.
- 5 titles we like most by DR Horton
There are plenty of reasons to be skeptical about the rally in homebuilder stocks, names like DR Horton NYSE: DHI they are trending upwards and will continue to rise. They increase because the sector has normalized and the business provides value to shareholders. That’s a blunt way of putting it, but supply/demand metrics support industry growth and are happy to please customers and share profits with shareholders.
The takeaway from the second quarter report is that growth is sustainable and tailwinds are strengthening.
DR Horton has a strong neighborhood, drives higher
DR Horton reported a strong quarter despite the impact of inflation and high interest rates. The company closed on 22,548 homes, a 15% increase over last year. The average sales price decreased slightly from last year, but increased sequentially and was better than expected, leaving the top line at $9.11 billion or up 14.3%. The price increase is supported by demand and is expected to remain stable this year, adding an upward bias to the outlook.
(As of 04/18/2024 ET)
- 52 week interval
- $100.08
▼
$165.75
- Dividend yield
- 0.82%
- P/E ratio
- 10.50
- Price target
- $154.00
The news on margins is also good. The company increased its pre-tax profit margin by 170 basis points to 16%, thanks to price increases and cost controls. Net income rose 24% to $1.2 billion, and GAAP earnings rose 29%, helped by stock repurchases.
The guidance is why the stock is rebounding in early premarket trading. The company raised its revenue forecast to a range with the midpoint well above analyst consensus. As the company shows momentum right now, guidance is likely cautious. Backlog fell 7% year over year but increased 27% sequentially thanks to a 17% increase in new orders outpacing deliveries. Order backlog has increased sequentially for several quarters, providing a path to higher-than-expected growth. All they have to do is build the houses.
Regardless, forecast revenues of $36.7 billion to $37.7 billion represent a 3.5% increase at the low end of the range on top of last year’s 6% gain. Revenue growth will accelerate in 2025 as FOMC interest rate cuts (expected) unlock pent-up demand.
DR Horton improves shareholder value: returns capital
The only negative in the statement is that the cash balance is declining. This fact is offset by higher inventory, an increase in assets, and a 5% increase in equity capital. The cash flow also supports a dividend yielding around 0.75% with shares near $150 and share repurchases. Share repurchases totaled 2.7 million shares or about $400 million in the second quarter, lowering the average year-over-year bill by 3.3%. There is $901 million remaining on the authorization. The company is expected to increase the amount throughout the year.
Leverage remains low, with debt to total capital at 0.2X, and the company is well capitalized with large parcels and properties in its real estate pipeline. Book value, another measure of the company’s strength, increased 3.5% sequentially and is up double-digits from last year.
Analysts point to a new all-time high for DHI shares
Analysts are bullish on DHI stock, rating it a Moderate Buy and assigning it a consensus price target of $155. That target assumes a 3.5% upside for the market and is driven higher by revisions. Revisions over the past twelve months have increased the consensus by more than 55%, with the most recent targets well above that consensus. The most recent targets were set in April, about two weeks before the release of second-quarter earnings, assuming a range of $169 to $191, which is a midpoint about 20% higher than the current stock. Marketbeat did not track any reviews in the first hour of release.
The technical action is favorable. The market for DHI shares plunged in the weeks leading up to the report’s release, giving the market a 12% discount. The market now bounces from levels above the critical support of the 150-day EMA to align with the trend. Assuming the market follows this signal, the stock price should soon rise into the range between $160 and $165. $165 is the critical resistance level. It is an all-time high and may provide significant resistance. If the market can break above this level, the rally will continue and a move towards the high end of the analyst range is likely.
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