There have been a few signs that the booming housing market is losing steam. Housing inventories increased for the first time in three years back in June, and the average selling prices for new homes have started to slow down compared to prior quarters even though labor and materials costs are still on the rise. Despite these signs that headwinds are on the horizon, homebuilder D.R. Horton (NYSE:DHI) issued some rather ambitious guidance numbers, not just for the next fiscal year but for fiscal 2020 as well.

Let's take a look at D.R. Horton's most recent earnings results and see why management is confident in its strategy and the housing market that it can issue guidance so far into the future. 

Newly constructed home.

Image source: D.R. Horton.

By the numbers

Metric Q3 2018 Q2 2018 Q3 2017
Revenue $4.43 billion $3.79 billion $3.78 billion
Gross profit $1.04 billion $833.1 million $815.3 million
Net income $453.8 million $351.0 million $289.0 million
Diluted EPS $1.18 $0.93 $0.76

DATA SOURCE: D.R. HORTON EARNINGS RELEASE. EPS = EARNINGS PER SHARE.

The string of earnings results D.R. Horton has put together recently is truly impressive. Revenue was up 16.8% year over year as home closings increased 12% and the average selling price per home ticked up slightly. Even though average selling prices were up only modestly, management was able to keep costs in control such that its pre-tax margin ticked up 210 basis points to 13.9% and ended up beating Wall Street expectations for the quarter. It also thinks that many of the cost savings are sustainable and therefore increased its pre-tax margin guidance for the year to 12.7%-12.9%. 

The only noticeable sign of a slowdown was that net new orders only outpaced homes closed by 3.7%. This is similar to the book-to-bill ratio for industrial companies. This number says that the business is expanding but at a rather modest pace. In the past few years, some homebuilders' net new orders were outpacing homes closed by double-digit rates. 

DHI closings by region for Q3 2017, Q2 2018, and Q3 2018. Shows gains in every region except a modest decline in the Southeast.

Data source: D.R. Horton earnings release. Chart by author.

What management had to say

According to COO Michael Murray:

Our balanced capital approach focuses on being flexible, opportunistic and disciplined. Our balance sheet's strength, liquidity, earnings growth and cash flow generation are increasing our flexibility, and we plan to utilize our strong position to enhance long-term value of the company. Our top cash flow priorities are to consolidate market share by investing in our homebuilding business and strategic acquisitions, reduce homebuilding leverage and return capital to our shareholders through dividends and share repurchases.

We have been actively pursuing select acquisitions across the country and expect to deploy more capital for this purpose over the next year. This quarter, we purchased the assets of two small private builders for approximately $18 million. We acquired Lexington Homes to enter the Spokane, Washington market and Permian Homes to solidify our position as the largest builder in the Midland/Odessa market in Texas.

DHI Chart

DHI data by YCharts.

Ambitious guidance for a volatile housing market

Despite the signs of a slowdown, D.R. Horton's management gave some preliminary guidance for fiscal years 2019 and 2020. For the next fiscal year, management anticipates that it will be able to grow revenue by an additional 10%-15% and maintain a pre-tax margin of 13%. It's also guiding for more than $1.25 billion in operating cash flow for fiscal year 2020 -- for reference, it has generated $300 million in the first nine months of fiscal 2018. Those are rather ambitious targets, which may not be attainable if we see a significant slowdown in new homes sold over the next 18 months or so.

Still, as noted on its conference call, demand at lower price points for first-time buyers remains high. If the company can focus more of its capital toward these kinds of homes and still maintain control of costs, then those revenue growth and margin numbers don't sound that absurd.  

Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.