D.R. Horton Expects Home Delivery Growth in 2024 Despite Challenging Housing Market Conditions

Sector Director

Brian Bernard

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D.R. Horton is the largest U.S. homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

Residential construction was a bright spot during pandemic-affected 2020-21, and housing starts remained elevated at 1.555 million units in 2022 as homebuilders worked through extensive backlogs. However, challenging affordability has weighed on housing demand, and we project starts to decrease 10% in 2023 to 1.395 million. We forecast total starts will decline about 4% in 2024, but that’s due to over a 20% decline in multifamily starts after two years of robust multifamily construction. We expect single-family starts will increase 6% next year. Between 2024 and 2026, we project mid- to high-single-digit percentage growth for both single and multifamily construction, with total housing starts eclipsing 1.5 million units by 2026. Over a longer horizon, we think about a 1.3 million-1.4-million-unit annual production pace is a reasonable assumption.

Recognizing the importance of the price-conscious first-time buyer in the continued recovery, D.R. Horton launched Express Homes, its entry-level product, in spring 2014. This bet has paid off thus far as the Express Homes product line now accounts for about 30% of homes sold. With ample land supply and product offerings catering to entry-level, move-up, higher-end, and active adult homebuyers, D.R. Horton is well positioned to capitalize on the favorable housing demographics.

D.R. Horton’s balance sheet is the strongest it has been in years, and we expect the company will use its improved financial flexibility to invest in attractive growth opportunities. We believe that an undersupplied U.S. housing market, D.R. Horton's successful inventory management initiatives, and its improved financial flexibility will support more consistent revenue growth and cash flow generation.

Business Strategy & Outlook

D.R. Horton clearly enjoys certain benefits from its large scale; however, it operates in an extremely cyclical, competitive, capital-intensive industry that has prevented the company from earning consistent positive economic profits over the business cycle. As such, we assign D.R. Horton a no-moat rating.

D.R. Horton faces significant competition that can act irrationally. The fragmented homebuilding industry features 17 public homebuilders and many more private regional and local homebuilders. All of these builders compete for land, materials, labor, and customers. Irrational behavior, such as aggressively pushing incentives to drive better community absorption rates or overbidding on land deals, can mean adverse repercussions for the entire industry. Competitors can also enter new markets and replicate successful product and land acquisition strategies with relative ease, potentially diminishing returns for incumbents. Historically, homebuilders have used mergers and acquisitions as a means to enter new markets because acquiring an existing builder grants immediate access to the new market with less risk than a greenfield startup operation. We see few barriers preventing builders from replicating successful product and land acquisition strategies, especially for public companies with the scale, experience, and capital availability to do so.

While we believe D.R. Horton’s scale provides cost efficiencies that smaller builders may find difficult to replicate, these efficiencies are much less pronounced when compared with other public builders. In fact, D.R. Horton’s homebuilding margins have generally been in line with the industry over the past several years, suggesting that other public builders are also able to manage input costs. Furthermore, although D.R. Horton has strong relationships with contractors and land developers, we do not think it is able to negotiate meaningful long-term price concessions, especially given the tightness of the current construction market and land supply.

The company offers four main brands—Express Homes, D.R. Horton Homes, Emerald Homes, and Freedom Homes—each targeting distinct segments of the homebuyer market. Express targets price-conscious entry-level buyers; D.R. Horton Homes targets first-time buyers and move-up buyers; Emerald Homes targets the higher end of the market; and Freedom Homes targets active adults. Although we believe the company’s brand recognition can drive increased foot traffic, our opinion is that location and pricing are much more important than brand reputation for customers. 

Homebuilders spend substantial time and effort completing due diligence before acquiring land and building communities. Still, land and communities can underperform initial expectations for myriad reasons, resulting in potential margin dilution and impairment charges. Land option contracts, which grant homebuilders the right, but generally not the obligation, to buy land at predetermined prices, can mitigate many of the risks associated with outright land purchases. An option contract strategy generally leads to lower average land inventory on the balance sheet and higher ROICs. NVR is an example of a homebuilder that has successfully executed this “land light” strategy for years. Despite the benefits of this strategy, public homebuilders still own about 50% of land holdings, on average. D.R. Horton has made a conscious effort to expand its optioned lot count, and its fiscal 2023 fourth-quarter mix was 25% owned and 75% optioned.

Economic conditions can have a profound impact on homebuilder profitability, as witnessed during the last housing downturn of 2006-09. D.R. Horton went from earning $4.62 per diluted share in fiscal 2005 to losing $8.34 per diluted share in fiscal 2008 as the collapsing housing market resulted in drastic margin compression and large impairment charges. Between fiscal 2006 and 2009, D.R. Horton recognized $4.1 billion of inventory impairment charges. The last downturn is an extreme example; however, it is typical for homebuilder profitability to ebb and flow throughout each housing cycle.

D.R. Horton is exposed to several environmental, social, and governance risks, including product governance, carbon and other emissions, effluents and waste, and human capital. However, we don't believe these risks could result in material value destruction. Furthermore, these risks are already considered in our High Uncertainty Rating. 

Product quality issues do arise in the homebuilding industry (for example, construction defects); however, such incidents are generally confined to relatively few homes and are usually remedied via homebuilder, subcontractor, or manufacturer warranties. Warranties and prompt remediation can reduce reputational risk from such events, while insurance policies and contractor indemnification can limit financial losses.

Residential construction consumes a significant amount of energy to power construction equipment and transport building materials and construction and demolition waste. However, we're not concerned about the industry's ability to embrace more energy-efficient construction practices. As one of the largest homebuilders in the United States, D.R. Horton could be a leader in such efforts, in our opinion. It's also important to note that new homes have become increasingly energy-efficient (for example, installing solar roof panels or Energy Star-certified products). We believe these efforts help mitigate the environmental impact of homebuilding operations. 

D.R. Horton is not immune to the human capital issue that has plagued the homebuilding industry. There's been a shortage of skilled construction labor for some time that has been exacerbated by an aging workforce. The labor shortage has increased labor costs for homebuilders and can extend the length of time it takes to build a home. That said, D.R. Horton can leverage it superior scale to attract and retain subcontractors. We consider the financial impact of a persistent labor shortage in our base-case scenario.

None

Economic Moat

D.R. Horton

D.R. Horton, Inc. operates as a home building company, which engages in the construction and sale of single-family housing. It operates through the following segments: Homebuilding, Forestar, Financial Services, Rental, and Others. The Homebuilding segment includes the acquisition and development of land and the construction and sale of residential homes. The Forestar segment invests in land acquisition and development to expand its business across the United States. The Financial Services segment is involved in mortgage financing and title agency services to homebuyers. The Rental segment focuses on of multi-family and single-family rental operations. The company was founded by Donald Ray Horton in 1978 and is headquartered in Arlington, TX.

Earnings data Q1 2024

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D.R. Horton, Inc. is a homebuilding company, which engages in the construction and sale of single-family housing. It operates through the following geographical segments: Northwest, Southwest, South Central, Southeast, East, and North. The Northwest segment includes Colorado, Oregon, Utah, and Washington. The Southwest segment includes Arizona, California, Hawaii, Nevada, and New Mexico. The South Central segment focuses on Arkansas, Oklahoma, and Texas. The Southeast segment includes Alabama, Florida, Louisiana, and Mississippi. The East segment includes Georgia, North Carolina, South Carolina, and Tennessee. The North segment focuses on Delaware, Illinois, Indiana, Iowa, Kentucky, Maryland, Minnesota, Nebraska, New Jersey, Ohio, Pennsylvania, Virginia, and West Virginia. The company was founded by Donald Ray Horton in 1978 and is headquartered in Arlington, TX.

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D.R. Horton, Inc. (NYSE:DHI ) Q4 2023 Results Earnings Conference Call November 7, 2023 8:30 AM ET Company Participants Jessica Hansen - Vice President of Investor Relations David Auld - Vice Chairman of the Board Paul Romanowski - President and Chief Executive Officer Michael Murray - Executive Vice President and Chief Operating Officer Bill Wheat - Executive Vice President and Chief Financial Officer Conference Call Participants John Lovallo - UBS Stephen Kim - Evercore ISI Joe Ahlersmeyer - Deutsche Bank Carl Reichardt - BTIG Mike Rehaut - J.P. Morgan Matthew Bouley - Barclays Capital Alan Ratner - Zelman and Associates Anthony Pettinari - Citigroup Ken Zener - Seaport Research Partners Susan Maklari - Goldman Sachs Rafe Jadrosich - Bank of America Jade Rahmani - Keefe, Bruyette & Woods Michael Dahl - RBC Capital Markets Operator Good morning and welcome to the fourth quarter 2023 earnings conference call for D.R.

D.R. Horton, Inc. (DHI) Q4 2023 Earnings Call Transcript

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D.R. Horton Inc.'s stock DHI, -0.96% was up by 1.3% in premarket trading Tuesday after the home builder's fiscal fourth-quarter results beat Wall Street analyst estimates for profit and revenue. “Despite continued higher mortgage rates and inflationary pressures, our net sales orders increased 39% from the prior year quarter, as the supply of both new and existing homes at affordable price points remains limited and demographics supporting housing demand remain favorable,” the company said.

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ARLINGTON, Texas--(BUSINESS WIRE)---- $DHI #earnings--D.R. Horton reported net income of $4.45 per diluted share for its fourth fiscal quarter ended September 30, 2023.

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News for D.R. Horton Stock (DHI)