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Buyouts Benefit D.R. Horton (DHI) Amid Supply-Related Woes

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The U.S. housing market has been going good and bravely navigating the challenges arising from unprecedented supply chain disruptions, delayed delivery of certain building materials as well as a tight labor market. More desire for spacious homes to work from home amid the pandemic and low borrowing costs have been driving growth of D.R. Horton DHI, and others such as Lennar LEN, PulteGroup, Inc. PHM as well as KB Home KBH in the Zacks Building Products - Home Builders industry.

D.R. Horton — being one of the leading national homebuilders (primarily engaged in the construction and sale of single-family houses, both in entry-level and move-up markets) — has been benefiting from industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.

Yet, supply chain challenges, and rising land and labor costs are concerns for this Texas-based homebuilder as well as other industry bellwethers.

Let’s delve deeper into the major growth drivers of D.R. Horton.

Significant Market Share

D.R. Horton is primarily engaged in the acquisition and development of land along with the construction and sale of residential homes, with operations in 96 markets across 30 states. Acquisitions have been an important part of D.R. Horton’s growth strategy to expand its presence. In October 2020, it acquired the homebuilding operations of Braselton Homes, the largest homebuilder in Corpus Christi, TX.

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, lots, and homes place it in a strong competitive position to meet the demand in the upcoming quarters, thereby growing sales and home closings. For third-quarter fiscal 2021, homebuilding investments in lots, land and development totaled $1.8 billion, of which $910 million was for finished lots, $540 million for land development, and $350 million to acquire land.

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 has been paying off, with the segment experiencing strong demand and limited supply. First-time homebuyers represented 58% of its closings for third-quarter fiscal 2021, up sequentially.

Cost Control & Better Fixed-Cost Leverage

Management has consistently made an effort to reduce both construction cost and selling, general and administrative (SG&A) expenses. It controls construction costs by designing homes efficiently, and obtaining construction materials and labor at competitive prices. For third-quarter fiscal 2021, SG&A expenses — as a percentage of homebuilding revenues — improved 80 basis points year over year to 7.1%.


Supply Chain-Related Challenges

Despite a solid demand environment, D.R. Horton witnessed low net sales order in the fiscal third quarter. Multiple disruptions in the supply chain along with improved economic conditions and strong demand for new homes have resulted in shortages of building materials and labor, which ultimately caused construction time to become less predictable. As the company has slowed home sales pace to align to the current production levels, reduced orders are likely to persist in the fiscal fourth quarter as well.

Recently, D.R. Horton reduced its fourth-quarter fiscal 2021 guidance. It now expects fiscal fourth-quarter homes closed within 21,300-21,700 compared with 23,000-24,500 expected earlier. For fiscal 2021, the company expects homes closed to increase 24-25% or 81,300-81,700 versus 83,000-84,500 projected earlier.

Owing to reduced closing volume, partially offset by an increase in the average sales price of homes closed, D.R. Horton now expects revenues between $7.7 billion and $7.9 billion compared with the prior projected range of $7.9-$8.4 billion. It now expects fiscal 2021 revenues to rise 35-36% from a year ago to $27.4-$27.6 billion versus the previous guided range of $27.6-$28.1 billion.

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