D.R. Horton Stock Has Tailwinds To Drive it Higher

Key Points

• D.R. Horton had another solid quarter and guided the market higher for 2024. 
• The backlog is growing sequentially and supports accelerating growth: all they have to do is build the houses. 
• Dividends, share repurchases, rising equity, and increasing book value will help drive this stock to new highs. 

As many reasons as there are to be skeptical of the rally in homebuilder stocks, names like D.R. Horton NYSE: DHI are trending higher and will continue to rise. They rise because the industry normalized and the business provides value for shareholders. That’s a blunt way of putting it, but supply/demand metrics support growth in the industry, and they are happy to oblige customers and share profits with shareholders.

The takeaway from the Q2 report is that growth is sustainable, and the tailwinds are gaining strength. 

D.R. Horton has a Strong Quarter, Guides Higher

D.R. Horton had a strong quarter despite the impact of inflation and high interest rates. The company closed 22,548 homes, which is good for a gain of 15% compared to last year. The average selling price fell slightly compared to last year but rose sequentially and came in better than expected, leaving the top line at $9.11 billion or up 14.3%. The rise in prices is supported by demand and is expected to remain steady this year, adding upward bias to the outlook. 

Margin news is also good. The company increased its pretax profit margin by 170 bps to 16% on higher prices and cost control. Net income rose 24% to $1.2 billion, and GAAP earnings rose by 29%, aided by share repurchases. 

Guidance is why the stock is rebounding in early premarket trading. The company raised its guidance for revenue to a range with the mid-point well above the analysts' consensus. Because the company shows momentum now, the guidance is likely cautious. The backlog is down 7% YOY but up 27% sequentially on a 17% rise in new orders that outpaced deliveries. The backlog has risen sequentially for several quarters, providing a pathway to growth above forecast. All they have to do is build the houses. 

Regardless, the $36.7 to $37.7 billion in forecasted revenue is a 3.5% increase at the range’s low end on top of last year’s 6% gain. Revenue growth will accelerate in 2025 as FOMC interest rate cuts (expected) unlock pent-up demand. 

D.R. Horton Improves Shareholder Value: Returns Capital 

The only negative in the statement is that the cash balance is down. That fact is offset by higher inventory, increased assets, and a 5% rise in shareholder equity. The cash flow also supports a dividend yielding about 0.75% with shares near $150 and share repurchases. Share repurchases amounted to 2.7 million shares or about $400 million in Q2 to bring the average YOY count down by 3.3%. There is $901 million left on the authorization. The company is expected to increase the amount later in the year. 

Leverage remains low, with debt to total capital at 0.2X, and the company is well capitalized with ample lots and properties in its real estate pipeline. Book value, another measure of company strength, rose by 3.5% sequentially and is up double-digits compared to last year. 

Analysts Point to a New All-Time High for DHI Stock

The analysts are bullish on DHI stock, rating it at Moderate Buy and giving it a consensus price target of $155. That target assumes a 3.5% upside for the market and is led higher by revisions. The revisions for the past twelve months have lifted the consensus by more than 55%, with the freshest targets well above it. The freshest targets were set in April, about two weeks before the Q2 earnings release, assuming a range of $169 to $191 or a mid-point roughly 20% above the current action. Marketbeat has not tracked any revisions in the first hour since the release. 

The technical action is favorable. The market for DHI stock fell in the weeks leading into the report, giving the market a 12% discount. The market now rebounds from levels above critical support at the 150-day EMA to align with the trend. Assuming the market follows through on this signal, the stock price should soon move up to the $160 to $165 range. $165 is the critical resistance level. It is an all-time high and may provide significant resistance. If the market can get above that level, the rally will continue, and a move toward the high end of the analysts' range is likely.