For those hoping for relief on the mortgage rate front, Fed Chair Jerome Powell had some bad news earlier this week.
Powell, who had said in March that the central bank was still on track for three rate cuts this year, warned that inflation was not coming down as expected. He said that "Recent data have clearly not given us greater confidence" that inflation is coming down, and hinted once again that rates would stay higher for longer unless inflation started falling again.
If you're a prospective homebuyer or even a seller, those comments are likely a disappointment. The housing market continues to be frozen by the rate-lock effect. Homeowners who got a low mortgage during the pandemic's height are reluctant to sell and take on a much higher mortgage rate, and elevated mortgage rates mean that's unlikely to change.
However, it is good news for one set of companies. Homebuilders like D.R. Horton (DHI 2.63%), the U.S.'s largest homebuilder, are likely to benefit from a continued higher-for-longer interest rate regime. Homebuilders have been filling the supply gap as existing home sales have fallen to near-30-year lows. There's also an estimated shortage of 4 million homes in the U.S., which should help fuel demand for D.R. Horton's services even if mortgage rates come down.
That's one reason why the stock looks like a buy. Another was on display in the company's recent earnings report. Let's take a closer look.
Image source: Getty Images.
D.R. Horton shines again
The U.S.'s largest homebuilder continued to benefit from pent-up demand for new homes. Revenue rose 14% in its fiscal second quarter to $9.1 billion, which was well ahead of estimates at $8.27 billion.
On the bottom line, net income jumped 24% to $1.2 billion, giving the company a profit margin of 13.2% in a seasonally slow quarter. On a per-share basis, D.R. Horton reported earnings of $3.52, up 29% from the quarter a year ago as it benefited from share buybacks. That figure also easily topped estimates at $3.06.
Other key metrics also showed the business growing at a steady pace. Homes closed increased 15% to 22,548, and sales orders, an indicator of future revenue, rose 14% to 26,456.
Sales orders also grew in all six regions, showing demand is broad-based. Growth was especially strong in the Southwest, where orders were up more than 50% as the company moves beyond its historical base in the South.
Finally, D.R. Horton also expects the momentum to continue, as it raised its revenue guidance for the year. It now expects revenue of $36.7 billion to $37.7 billion, up from a previous range of $36 billion to $37 billion, implying a revenue increase of 4.9% at the midpoint.
NYSE: DHI
Key Data Points
Is D.R. Horton a buy?
Investors mostly shrugged off the results. The stock closed Thursday up 0.1% after opening with stronger gains.
The market seems to be skeptical that D.R. Horton can keep growing, as the housing market is volatile and homebuilder stocks got crushed by the housing crash in the great financial crisis. However, the company's balance sheet looks rock solid now with roughly $24 billion in net tangible assets, which compares to a market cap of just $48.4 billion.
The stock also looks like a bargain on a price-to-earnings basis, trading at a valuation of less than 10. Estimates are likely to go up after it raised its guidance and put up a strong beat on the top and bottom lines. Meanwhile, D.R. Horton is also steadily buying back stock with plans to repurchase $1.6 billion this year, reducing shares outstanding by 3% to 4%.
The latest comments from Fed Chair Powell also signal that mortgage rates could remain elevated through the rest of 2024, pumping more demand for D.R. Horton's homes and filling its coffers.
With a cheap price, solid growth prospects, and excellent cash flow, the stock looks like a great buy right now.
