Homebuilder D.R. Horton (DHI) is experiencing a significant surge after surpassing Q3 expectations both on the top and bottom lines. The demand for new home construction remains strong due to limited housing supply and favorable demographics. Additionally, DHI announced a new $4 billion share repurchase program, propelling the stock to all-time highs. This momentum is also benefiting other homebuilder stocks, including Lennar (LEN), Toll Brothers (TOL), and PulteGroup (PHM).
Home affordability remains a critical issue for DHI and other homebuilders as high mortgage rates and tight budgets make home ownership challenging for many. To address this, DHI and its peers are offering incentives such as mortgage rate buydowns and reduced home prices.
DHI primarily targets first-time homebuyers, with an average sales price of around $379,000 in Q3, a slight decrease of 1% year-over-year. This makes DHI more sensitive to affordability issues compared to other homebuilders.
The increase in incentives has put homebuilding margins under scrutiny across the industry. However, DHI pleasantly surprised investors in Q3 by improving its gross profit margin on home sales by 80 basis points quarter-over-quarter to 24%, surpassing expectations as incentive-related costs declined from the previous year.
Despite the improvement, DHI stated during its earnings call that incentives remain elevated and are not expected to change significantly in the near term. Consequently, DHI anticipates Q4 homebuilding gross margin to be similar to Q3, which is positive given the current environment.
DHI's downside Q4 revenue guidance of $10.0-$10.4 billion is a slight concern. However, the company's narrowed FY24 revenue outlook aligns with estimates, mitigating the impact of the downside guidance.
DHI is well-positioned to continue gaining market share, with 42,600 homes in its inventory and average construction cycle times returning to normal levels. If the Federal Reserve begins cutting interest rates, DHI could achieve stronger margins on its inventory homes as they sell.
Overall, DHI delivered a robust Q3 performance, and its new $4 billion share repurchase authorization reflects strong confidence in the new home construction market and its growth prospects.
