As good as D.R. Horton’s (NYSE: DHI) Q2 results and outlook are, the home building industry is rushing toward a cliff that points to slowing sales over the long term. Supply/demand imbalances aside, the rise of inflation and interest rates is hurting the market; the quarterly strength is due primarily to a reduction in mortgage rates that may not last. The FOMC is expected to hike by another 25 basis points this year, and there is no definitive proof that inflation is tamed.
With oil prices rising again, investors should expect inflation to accelerate again and for the FOMC to hike interest rates above the current 500 to 525 basis point target. Even if inflation doesn’t reaccelerate, the FOMC should not be expected to reduce rates significantly for some time. The last time they eased back on the throttle, the economy became comfortable, and inflation perked up. The home builders aren’t going to go under, but investors should not expect the Q2 strength to last forever. Backlogs are in decline, and that is what allows for strength now.
D.R. Horton Pops On Results And Guidance
D.R. Horton had a great quarter delivering 19,664 homes worth $7.4 billion. That was compounded by financing activities and the sale of rental units that added almost $0.25 billion to the top line. The revenue is down only 0.4% compared to last year, beating the consensus by 2200 basis points. The outperformance is surprisingly large and a reason to rally, but details within the report take the shine out of the news.
The company’s net new orders rose sharply sequentially along with the pullback in home prices but are still down 5% compared to last year. A sequential improvement aided the net new orders in the cancelation rate, but cancelations are up compared to last year. The strength in order helped to offset the company's deliveries and increase the backlog sequentially, but once again, the YOY comparison is not favorable. The backlog is down 43% compared to last year and can be expected to continue falling, given the pace of construction.
The guidance is good but suggests backlogs will continue to fall. The new guidance assumes revenue of $31.5 billion at the low end of the range compared to $28.46 billion in consensus revenue. That includes the $1.49 billion in outperformance posted in Q2, which leaves room for Q3 and Q4 strength. The question that needs to be answered is what the Q3 and Q4 order situation looks like and how that will affect the outlook for revenue and earnings in 2024.
The Analysts Are Capping Gains For DHI Stock
The analysts are holding DHI stock, but they are also capping gains. Marketbeat hasn’t picked up any new commentaries, and the older ones assume this stock is already at fair value. The most recent include price target reductions and downgrades, with sentiment trending lower and the consensus price target flat at $98.35. That’s well below the all-time high, providing resistance in post-release trading action.
The value is attractive, but the dividend isn’t. The stock yields about 1.0%, which is compounded by share repurchases. The Q2 repurchases reach about 4% of the market cap, but investors should not expect the company to chase its share prices higher. More likely, DHI will buy back shares on price pullbacks and corrections. The weekly chart looks good, but the daily chart is different. The price pop shows clear resistance at the all-time high and opens a gap likely to be closed before a new all-time high is set and sustained.
