D.R. Horton, Inc. DHI has been riding high on the back of strategic acquisitions, strong backlog, and a well-stocked supply of land, lots and homes. Affordable product offerings across multiple brands and its cost-reduction moves add to the bliss.
Shares of this leading homebuilding company have gained 41.5% so far this year, outperforming its industry’s 34.3% rally. The solid price performance was backed by D.R. Horton’s focus on strategically consolidating market share while growing revenues and profits, generating strong cash flows and returns, along with maintaining a flexible financial position.
Notably, in fiscal third-quarter 2019, the company’s top and bottom lines not only topped analysts’ expectation but also improved year over year, given higher home deliveries.
Let’s delve deeper into factors that substantiate its Zacks Rank #2 (Buy).
Strategic Buyouts to Enhance Market Position: D.R. Horton keeps on investing in various desirable companies to enhance its portfolio. In fiscal first-quarter 2019, the company acquired homebuilding operations of three private builders, namely Westport Homes, Classic Builders and Terramor Homes, for approximately $325.9 million. These buyouts enhanced its market position in various locations.
Notably, during the first nine months of fiscal 2019, the value of net sales orders grew 4% year over year on the back of strong East, Midwest and Southeast regions. These acquisitions added 194 and 887 net sales orders to the East and Midwest region’s results, respectively. The company expects these buyouts to help it gain further.
Investments in Lands: Despite suffering from unfavorable conditions prevailing in the markets served, the company’s strong cash position and low debt/capital ratio allowed it to make strategic land purchases, in turn giving D.R. Horton a significant competitive advantage over its peers. These optimally-priced land and lots help it create attractive communities in desirable markets to meet the demand in future.
The company had made investments in lots, land and development of $1.1 billion, $740 million and $875 million in the first, second, and third quarters of fiscal 2019. Moreover, it plans to invest more going forward.
Affordable Homes to Boost Profitability: D.R. Horton’s strategic shift toward more entry-level affordable homes has been paying off. The Homebuilding segment (which contributed 97.1% to fiscal third-quarter total revenues) is experiencing strong demand and limited supply. Notably, first-time homebuyers represented 51% of its closings in the fiscal third quarter, up from 48% in the corresponding period of the last year.
Meanwhile, after soaring to seven-year highs in November 2018, mortgage rates are showing signs of relief, thereby boosting investors’ confidence to some extent. The Zacks Consensus Estimate for earnings for the current year have also been trending upward over the past seven days, reflecting analysts’ optimism over the company’s bottom-line growth prospects.
Effective Cost Management: In order to reduce inflated costs and expenses, the company has undertaken certain cost-saving initiatives. It keeps construction costs in check by designing homes efficiently, and obtaining construction materials and labor at competitive prices. Notably, its SG&A expenses are continuously declining due to cost control and improved fixed cost leverage. In fiscal 2018, SG&A expenses declined 30 basis points (bps) year over year but the same was marginally up in the nine-month period ended Jun 30, 2019. It expects SG&A improvement of 10-30 bps in fiscal 2019.
The company’s homebuilding return on inventory (ROI) improved over the past three years from 15.4% in fiscal 2016 to 16.6% and 20.2% in fiscal 2017 and 2018, respectively. Notably, in the trailing 12 months ended Jun 30, 2019, homebuilding ROI expanded 100 bps to 18.1%.
Solid VGM Score & Superior ROE: D.R. Horton has an impressive VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer solid investment choices.
D.R. Horton’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 16.7% compares favorably with the industry average of 12%, 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 M.D.C. Holdings, Inc. MDC, each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
KB Home, Meritage Homes and M.D.C. Holdings’ long-term earnings are expected to increase 8.8%, 8.2% and 8.4%, respectively.
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