The Housing Boom Is Only Getting Started At D.R. Horton, Inc
D.R. Horton (NYSE:DHI) reported a very strong quarter for fiscal Q4 and we are not surprised. Not only did the company’s previous two quarters lead up to it but the recent data suggest a robust acceleration of what were already strong trends. Simply put, D.R. Horton and the entire home building industry is about to boom. Really boom, and in a very sustainable way because demand is high and inventory is at the lowest levels since the Fed started tracking it. Just to touch base on the demand picture, the latest reading of the housing starts and building permits data show high-double digit YOY increases for the last four months which put them both at post-Housing Bubble highs.
D.R. Horton Has Blowout Quarter
D.R. Horton had a blow out quarter that not only produced high-double-digit YOY revenue gains but beat the consensus by 500 basis points. The $5.9 billion in reported consolidated revenue is up nearly 47% from the previous on a 45% increase in closings and a 48% increase in closing value. Orders for new homes rose 56% which is important to note because new orders are outpacing closings and leading to higher backlogs. Also of note, the value of new orders outpaced the number of new orders by 600% basis showing not only YOY margin improvement but accelerating improvement from 2020.
In terms of backlogs, the number of homes in the backlog rose by 107% with a 111% increase in net value. Couple this with a 200 basis point decline in cancelations and the company looks well set for 2021 at least. Moving down the report, the earnings leverage implied by other data is evidenced by the EBIT margins which grew 440 basis points to outpace the consensus.
Looking forward, the company is guiding the market higher with 2021 revenue expected in the range of $25.2 to $25.8 billion versus the $25.2 billion consensus figure. Based on the data this forecast may be too light but really comes down to hiring. Hiring and retention is a problem in the construction sector and may hamper D.R. Horton’s ability to cash in on its backlog over the coming year. The company is expecting to close on 80,000 to 82,000 homes in 2021, 25% more than in 2020.
“Housing market conditions remain very strong, and we are focused on maximizing returns and improving capital efficiency in each of our communities while increasing our market share. Our strong balance sheet, ample liquidity and low leverage provide us with flexibility to operate effectively through changing economic conditions, and we plan to maintain our disciplined approach to investing capital to enhance the long-term value of our company and returns to our shareholders,” said Donald R. Horton, chairman of the board.
D.R. Horton Is A Dividend-Growth Play
D.R. Horton doesn’t pay a fabulous dividend regarding its yield, only about 1.0% with shares trading near $78, but the outlook for dividend growth is robust. The company is paying out only 8% of its expected earnings in 2021 which is about the lowest payout ratio we’ve seen. Add to this accelerating earnings leverage, a record-setting backlog, rising demand, and a strong balance sheet and the odds of an 8th consecutive increase are all but assured. Considering the ample amount of unrestricted free cash flow and 22% CAGR the next increase should be a big one. It’s due in mid-2021.
The Technical Outlook: DHI Under Pressure But The Outlook Is Bullish
Shares of DHI came under pressure after the Q4 report was released but it should have been expected with shares trading at a record high. In the near-term, price action may continue lower before eventually setting a new all-time high but how low is very questionable. With the outlook so robust a significant move below $77.80 seems unlikely but it could happen. If so, the support target is near the $76 and then the $74 level. If not then investors might expect to see a consolidation at current levels before a break to new highs sometime in early spring if not sooner.
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