Suburban homebuilder D.R. Horton (NYSE:DHI) beat estimates on earnings and revenues.
The stock rose about 3%, as investors debated whether this is the start of something or the end.
The nation’s largest homebuilder earned $431 million, $1.16 per share fully diluted, on revenue of $4 billion. Revenue was up 14% but net income was up 50% compared with a year ago. It was helped by a $32.9 million tax gain on energy efficient home credits that was applied retroactively. The company also raised its guidance slightly for the full year.
The good news was muted by a U.S. Census Bureau release showing that new home sales overall fell in December, compared with the previous month. November sales had been lower than those in October. But total sales for the year were up 10.3% from 2018.
Suburbs Are Great Again
Horton, which is based in Arlington, Texas, is a suburban developer. In Atlanta it has dozens of developments, but none inside the city. Most are situated close to highways. D.R. Horton sells about two-thirds of its new homes for under $300,000. Many go in the $200,000-$250,000 range.
Shares are up 67% in the last year, but the trailing price-to-earnings ratio remains just 13, well below the market. The 17.5 cent dividend yields just 1.2%.
This makes Horton a great speculation for those who believe in economic growth, especially suburban growth. Suburban homes are less costly to build than those in cities. Horton also concentrates on fast-growing, low-cost markets. Those who are bullish on the stock call it a leader in the lower-cost segment of the market. Horton is also benefiting from very low mortgage rates.
The Affordability Crisis
Horton’s answer to the housing affordability crisis is to drive until you qualify. Its business model is over 40 years old. It runs counter to where many new jobs are, in high-cost cities. Horton buyers own cars and usually have kids.
Horton’s growth also runs counter to the nation’s changing demographics. American families are becoming smaller, with an average household size of 2.63. Americans’ median age is rising and is now about 38.
Still, the strong results from Horton raised other homebuilders’ boats. Rival PulteGroup (NYSE:PHM) also beat estimates. The stock prices of most homebuilders have gone above what analysts call their “buy points,” creating an affordability crisis all its own.
Steady As She Goes
In their conference call, Horton executives were cautious about the future.
They talked about having a conservative balance sheet, growing cash flow and financial flexibility. This includes keeping the debt-to-capital ratio below 40%. It means maintaining a high cash balance to finance construction.
It also means having a steady supply of building lots through a unit called Forestar (NYSE:FOR), which is separately capitalized. The forecast, they said, is steady as she goes.
The Bottom Line on DHI Stock
Horton represents an aging model for urban development built around low-cost wood construction and suburban locations.
It is successful despite defying demographic and development trends that have been underway for two decades. Buying the stock right now is betting that it can continue to defy that gravity.
Still, Horton shares do great in a growing economy. Over the last 10 years the shares are up more than 400%, which means an annualized gain of 40%. That’s double the average S&P 500 stock.
If you believe the suburbs can keep growing into the 2020s, Horton shares are a great way to show your confidence.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
