Will D.R. Horton Gain Further on Blooming Housing Prospect?

D.R. Horton, Inc. DHI has been rallying significantly recently. The uptrend can primarily be attributable to solid housing market prospects, accretive acquisitions, the well-stocked supply of land, lots and homes, and affordable product offerings across multiple brands. In fact, its industry-leading market share is helping the company to gain traction over the past several years.

Shares of D.R. Horton have advanced 20.7% over a month compared with the Zacks Building Products - Home Builders industry, Zacks Construction sector and the S&P 500’s 15.7%, 9.2% and 5.7% rally, respectively. In fact, the company hit a new 52-week high of $76.97 at the close of the session on Aug 21. The recent rally can primarily be attributable to resilient existing-home sales numbers for July, rising for two consecutive months. Per the National Association of Realtors, sales of previously owned homes jumped a notable 24.7% in July from the previous month and 8.7% year over year. This marked the highest monthly gain in the survey’s history since 1968.

Meanwhile, earnings estimates for the company’s fiscal 2020 have gained 20% over the past 30 days. Notably, earnings for the current year are expected to witness 35.7% year-over-year growth. Also, its earnings are expected to rise 13.58% in the next three-five years. Notably, the company’s earnings surpassed analysts’ expectations in each of the trailing six quarters.

This Zacks Rank #1 (Strong Buy) company has an impressive VGM Score of B. Our VGM Score suggests that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 (Buy) make solid investment choices. You can see the complete list of today’s Zacks #1 Rank stocks here.

Here is Why This Stock is an Attractive Pick

Strategic Shift Toward Affordable Homes: Over the past few quarters, many notable homebuilders like Lennar LEN, PulteGroup PHM and KB Home KBH along with D.R. Horton have been focusing on affordability. As entry-level, first-time, move-up buyers are showing keen interest in low-priced homes, D.R. Horton’s shift toward more entry-level affordable homes has been paying off. The segment has been experiencing strong demand and limited supply.

Additionally, the coronavirus outbreak-led issues like market slowdown and layoffs have triggered buyers to move in lower-density markets, which is again a boon for the company. Notably, first-time homebuyers represented 57% of its closings in third-quarter fiscal 2020.

Solid Housing Market Scenario: The company is expected to benefit from healthy housing prospects backed by historically high homebuilders’ sentiment, which has risen to the highest level in the index’s 35-year history in August, matching the December 1998 level of 78. Moreover, homeowners are now looking for larger homes as they are working remotely. Also, low interest rates are encouraging such buyers by give them more purchasing power.

Notably, sales of new single-family homes in the United States have seen a strong uptick in the past few months post the April dip, triggering hopes that the COVID-19 outbreak-induced housing slowdown might be coming to an end. The July data, which is scheduled for Aug 25, will give a clear picture of second half of 2020.

Declining mortgage rates have been driving the U.S. housing industry recently. Although the world economy is still trying to recover from the consequences of the virus outbreak, soaring buyer traffic will certainly overcome the headwinds like higher lumber prices, labor shortage and inflating land prices. The better-than-expected job report and other recent economic data reflect a strong revival from the pandemic-led lows, pointing to a V-shaped recovery.

Strategic Initiatives: D.R. Horton has made certain plans to overcome the cost burden and improve profitability. Also, it invested in various businesses, and land and lots across the country to get a competitive edge over its peers.

It controls construction costs by efficiently designing homes, and obtaining construction materials and labor at competitive prices. Also, it strategically manages the pricing, incentives and sales pace across its markets in a manner that will optimize the returns on inventory investments. Notably, its SG&A expenses are continuously declining due to cost control and better fixed cost leverage.

Apart from this, over the past five years (through fiscal 2019), the company has invested approximately $1 billion on acquisitions. 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 coming quarters, in turn, increasing sales and home closings.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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