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D.R. Horton to Gain from Forestar Buyout, Backlog Strong

On Jul 11, we issued an updated research report on leading national homebuilder D.R. Horton, Inc. DHI.

Robust backlog and a well-stocked inventory of land, lots and homes are expected to boost D.R. Horton’s performance. Also, the company will benefit from the recently concluded definitive merger agreement with Forestar Group.

Notably, D.R. Horton’s shares have gained 36% so far this year, outperforming the Zacks categorized Building-Residential/Commercial industry’s gain of 29.4%. Estimates for the current quarter and year have remained stable over the past 60 days. Also, this Zacks Rank #2 (Buy) stock rallied to a 52-week high of $37.43 on Jul 10. The stock pulled back to end the trading session at $37.17.

Inventory Strong, Strategies on Track

In Jun 2017, the company signed a definitive merger agreement to buy 75% shares of Forestar Group, a residential and mixed-use real estate development company. The merger deal is valued at about $560 million and is expected to close in the fourth quarter of 2017. With the deal, D.R. Horton will be able to expand operations in Texas, which is witnessing positive housing momentum. It is also expected to contribute around $1 billion in annual revenues over the next five years.

D.R. Horton’s well-stocked supply of land, plots and homes lends it the means to meet demand in the future, thereby boosting sales and home closings.  The company invested $1.7 billion in lots, land and development in the first half of fiscal 2017, higher than $1.1 billion expended a year ago.

Management has consistently made efforts to reduce both construction and selling, general and administrative (SG&A) expenses. Its SG&A expenses have been steadily going down on solid cost control and improved fixed cost leverage. Homebuilding SG&A expenses in fiscal 2016 improved 20 basis points (bps) to 9.3% from 9.5% in 2015, as higher revenues improved the leverage of its fixed overhead costs.

The company strategically manages the pricing, incentives and sales pace across its markets in a manner that will optimize the returns on inventory investments. It believes a consistent sales pace through inventory turnover is the best way to maximize profits and returns. The company’s total home building pre-tax return on inventory has improved over the past three years from 5.5% in fiscal 2012 to 11.1% in fiscal 2014 to 12.8% in fiscal 2015 to 15.4% in fiscal 2016.

As of Mar 31, 2017, D.R. Horton’s homebuilding return on inventory improved 220 bps to 16% from 13.8% a year ago. The company is on track to generate $300–$500 million of positive cash flows from operations in fiscal 2017. With 27,100 homes in inventory as of the end of Mar 2017, and 227,000 owned and controlled lots, D. R. Horton is well poised for the rest of fiscal 2017 and beyond.

Labor Market a Dampener

Currently, rising land costs and a tight labor market are threatening homebuilders’ margins, thus hampering the initiatives adopted by them to tap into the strength of the U.S. housing market. The labor market has also tightened with limited availability of labor, arresting the rapid growth in housing production.

Other Stocks to Consider

A few other top-ranked stocks in the industry are Lyon William Homes WLH, M.D.C. Holdings, Inc. MDC and NVR, Inc NVR.

Lyon William carries a Zacks Rank #1 (Strong Buy), while the other two companies carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lyon William is expected to exhibit 38.4% growth in 2017 earnings.

M.D.C. Holdings is estimated to witness 27.9% earnings growth, while NVR is likely to see a 24.8% rise in 2017 earnings.

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D.R. Horton, Inc. (DHI): Free Stock Analysis Report
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