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5 Factors That Underscore D.R. Horton's (DHI) Solid Prospects

Zacks Equity Research

D.R. Horton, Inc. DHI has been riding high, courtesy of rebounding housing market fundamentals, its 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 TX-based homebuilder have returned 56.8% year to date, steadily outperforming the industry’s 48.8% rally. Also, it has outperformed the S&P 500’s 22.2% rise in the said period.

The price performance was backed by the company’s robust earnings surprise history, having surpassed the Zacks Consensus Estimate in six of the trailing eight quarters. Its revenues also surpassed the consensus mark in seven of the trailing eight quarters.

Earnings estimates for the current fiscal year have moved 0.4% north over the past seven 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.



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

What Makes the Stock an Attractive Pick?

Stellar Performance: D.R. Horton ended fiscal 2019 on a strong note. Earnings per share and revenues increased 13% and 9.4%, respectively, 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. In fiscal 2019, homes closed increased 10% year over year to 56,975 units and 9% in value to $16.9 billion. Additionally, homebuilding cash flow from operations was $1.4 billion. This solid performance is expected to continue in the quarters ahead, buoyed by rebounding U.S. housing fundamentals.

Solid Underlying Housing Market Fundamentals: The U.S. housing market started building up strength since the beginning of 2019, after a torrid second-half 2018. Favorable 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.

This positive momentum is evident from the company’s homebuilding revenue growth of 10.2% year over year in fourth-quarter fiscal 2019. Home closings increased 9% from the prior-year quarter to 16,024 and 10% in value to $4.8 billion. Notably, value of net orders improved 16% year over year to $4 billion in the quarter.

Accretive Acquisitions & Increased Capital Investments in Land: D.R. Horton is rapidly acquiring homebuilding companies in desirable markets. Over the past five years (through fiscal 2019), the company has invested approximately $1 billion on acquisitions.

Strong cash position and low debt/capital ratio allowed it to make strategic land purchases even during the downturn, in turn giving it a significant competitive advantage. The company has selectively invested in attractively-priced land and lots in the past few years, allowing it to bring new attractive communities in desirable markets. D.R. Horton’s well-stocked supply of land, plots and homes provides it with a strong competitive position to meet the demand in the upcoming quarters, thereby boosting sales and home closings.

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 has plans to boost investments to replenish its land and lot supply in 2020 for supporting revenue growth.

Solid Growth Prospects: D.R. Horton has solid growth prospects, as is evident from the Zacks Consensus Estimate for earnings for the current year of $4.61 per share, indicating 7.5% year-over-year growth. Meanwhile, the company’s revenues are expected to increase 6.8% year over year in fiscal 2020. Moreover, its earnings and revenues are expected to increase 13.5% and 4.9% year over year, respectively, in fiscal 2021.

Overall, the company constitutes a great pick in terms of growth investment, supported by a Growth Score of B.

Superior ROE: D.R. Horton’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 16.6% compares favorably with the industry average of 12.1%, implying that it is efficient in using its shareholders’ funds.

Other Stocks to Consider

Other top-ranked stocks in the same space include KB Home KBH, Meritage Homes Corporation MTH and PulteGroup, Inc. PHM, each sporting a Zacks Rank #1.

KB Home’s earnings for fiscal 2020 are likely to increase 21%.

Meritage Homes’ earnings are expected to grow 20.6% in 2020.

PulteGroup’s 2020 earnings are likely to grow 10.4%.

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