D.R. Horton (NYSE: DHI) in Prime Position to Capitalize on Home Buying Trends

The good news keeps rolling in for homebuilders. In June, housing starts happened at a seasonally adjusted annual rate of 1.19 million, a 17% increase over May. Mortgage rates are now under 3% for the first time ever.

This comes after May housing data showed a sharp rebound over April. 

D.R. Horton NYSE: DHI has been one of the top performers in the sector, hitting all-time highs on Friday. Digging deeper into the data and home-buying shifts, DR Horton is uniquely positioned to capitalize.

D.R. Horton Sales of Newly Built Homes

According to a survey conducted by John Burns Real Estate Consulting, sales of newly built homes increased 55% annually in June. This marks the highest growth rate since 2005, in the latter stages of the housing boom. While that indicates a potentially overheated market at first glance, stricter lending requirements make the current market much more sustainable.

Founder and CEO John Burns said, “The anecdotal evidence is overwhelming. Sales in the distant commuter areas are the most robust. I believe a lot of computer-oriented people have proven to their co-workers that they can be productive from home, and have sensed, or officially been given the green light, to work from home at least a significant portion of the time after a vaccine has been found.”

A survey by Arizona-based builder Taylor Morrison found that high-tech homes and additional rooms for working and homeschooling is currently at the top of home buyer demands.

How Does This All Relate to D.R. Horton?

D.R. Horton is one of the most prominent builders in the country, operating in 29 states. The company offers a “Home is Connected” design, with smart home technology. Features include one-wire connectivity, geofencing technology, greater energy efficiencies, and more.

Furthermore, DHI’s average closing price is on the lower end at just over $300,000.

When you consider the technology and lower price, D.R. Horton is very well-positioned to capitalize on a mass exodus to the suburbs in a tight economic environment.

The numbers look promising moving forward – now let’s take a look at last quarter’s performance.

D.R. Horton Q2 2020 Earnings

D.R. Horton’s fiscal year ends on September 30; the company last reported earnings for Q2 2020, the period ending on March 31, 2020.

The company reported home sale revenues of $4.4 billion on 14,539 homes closed, up 10% yoy from $4 billion and 13,480 homes in Q2 2019. Net income increased 37% yoy to $351 million. Pre-tax profit margin jumped 260 basis points to 13.8%.

At the time of the earnings call (late April), D.R. Horton indicated that business took a turn for the worse in late March and April had been weak so far. This makes the strong numbers of May and June all the more impressive, showing the resilience of the housing market.

D.R. Horton Shares Are a Good Long-Term Value

There’s a lot to like when you look at DHI’s valuation metrics.

Shares are trading around 13x projected 2020 earnings and 1.25x projected 2020 sales. Looking forward to 2021, estimates put shares at 12.5x projected 2021 earnings and 1.18x projected 2021 sales.

This near-term projected growth follows impressive growth over the past decade. Looking at the last one year, three years, and ten years, DHI has double-digit annualized revenue and EBITDA growth over each of these three periods.

While business is looking up for DHI, it has enough liquidity to endure an unexpected slowdown with $1 billion of “unrestricted homebuilding” cash and access to another $1 billion in credit.

D.R. Horton Nice-Looking Chart

As mentioned earlier, DHI moved to fresh all-time highs on Friday.

After plunging to just above $25 a share at the onset of the pandemic, shares quickly recovered, overtaking the $50 level and 200-day moving average just two months later. Over the last two months, shares had been basing between $50 and $60 a share, before breaking out last Thursday.

There’s a lot to like on the DHI chart. Shares have increased for the last four days – and volume has increased over the preceding day for each of these days. Accelerating volume on a breakout is an excellent sign, showing the strength for a leg-up.

The two-month base between $50 and $60 was tight and of solid length, giving shares a chance to digest their previous gains and create a foundation for the next move. The RSI is nearing overbought territory but that’s to be expected on a strong breakout.

Yet another bullish sign is the 50-day moving average crossing over the 200-day a few weeks ago.

The only question – are shares a bit too extended?

There’s an argument to be made for that, but DHI is still only around 5% above the breakout point. While you could insist on a pullback, it may not be wise to play that game on a chart that looks as great as DHI.

The Final Word

D.R. Horton offers a great combination of a (very) reasonable valuation, impressive historical and forward growth, and bullish price action. DHI is a clear buy at current levels.