DR Horton Extends Rally After Raising Guidance

Home Builder Posts Robust Growth Despite Weak New Home Sales

There is a growing expectation that housing stocks (XHB) will outperform the broad market in 2020. A round of solid data, earnings reports from the nation’s top builders, pent up demand, and a persistent shortfall of inventory have set up a perfect storm of conditions. The builders have plenty of work, they can’t keep up with demand, and prices are rising.

Today’s New Home Sales data was a bit disappointing but does not alter the scenario. At 694000 annualized new home sales, the figure decelerated from the previous month contrary to expectations. A record-high in Home Builder Sentiment, rising permits and a surge in starts offset weak sales in December. Housing starts are up 40.8% YOY and point to a double-digit increase in closings this year.

DR Horton Crushes Estimates

Like they say, the proof is in the pudding. I can look at data and point out the strength in a market but that doesn’t matter if it the strength doesn’t translate into corporate revenue and profits. This morning, DR Horton (DHI) fulfilled the expectation of homebuilder profits when it reported earnings results. The company beat on the top and bottom lines and raised guidance. Based on the outlook for 2020 I don’t think this will be the last time the company, or the analysts, increase their expectations.

The headline results were fantastic. DR Horton increased revenue more than 14% from the last year and exceeded analysts’ estimates by 500 basis points. The GAAP EPS came in at $1.16 and $0.25 better than consensus due to pricing strength, sales mix, and cost-control efforts. In total, the consolidated pretax margin expanded 230 basis points and strength is expected next year.

The pace of new home orders increased by 19% over the previous year and is outpaced by the value of backlog. The value of the backlog jumped more than 22% as pricing and sales-mix factor into the equation. Comps will be harder to make in the latter half of the year but will remain positive if this data is any indication.

The Guidance Is Good, I Think It Will Get Better

Management issued a revision to guidance that reflects the company’s first-quarter strength and the outlook for 2020 housing markets. The increase wasn’t large, the previous range of $18.5 billion to $19.0 billion in annual revenue is now $18.5 to $19.1, but is above the analyst’s consensus and likely will be increased again.

The real question is how many homes the company can finish in 2020. The new guidance increased the upper limit of expected home closings by 0.8%, a number far below the pace of new orders. At this rate, DR Horton’s backlog will increase unnecessarily and risk an increase in cancellations.

Cancelations have been on the decline over the past few quarters and aiding results, I don’t think management would like to see that figure increase. The more likely scenario is the company will hire more construction employees to meet demand. The risk here is that labor markets are tight, finding employees is already a problem for most businesses.

The Technical Outlook: DHI Is Leading A Strong Industry

Shares of DHI led the housing industry last year and are leading again this year. Up more than 15% YTD, the stock surged on the earnings news and gained more than 1.0% in premarket trading. The stock opened at what would be a new all-time closing higher and proceeded to move up to set a fresh new all-time high.

The indicators are bullish suggesting upward price pressure. What I find telling is the Extreme Peak in MACD that formed with this year’s rally. The Extreme Peak is a sign of strength, the current peak is the largest MACD peak in over two years. The last such peak, slightly smaller, occurred in early 2019 right before the stock gained 44%. With prices so far above the short-term EMA, I am hesitant to recommend a buy but I am bullish on the stock. A pull-back in prices or consolidation may provide a better entry point.