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Why D.R. Horton Was Down 12.2% in September

By Brett Schafer – Oct 5, 2021 at 2:08PM

Key Points

  • D.R. Horton revised its guidance downward for its next quarterly report.
  • The reason was labor market tightness and supply chain problems.
  • The stock now trades at a P/E of less than 10.

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Supply chain issues will hurt the company's financials in 2021.

What happened

Shares of D.R. Horton (DHI -2.05%) were down 12.2% in September, according to data from S&P Global Market Intelligence. The homebuilder lowered its 2021 guidance because of a tightening labor market and disruptions to its supply chain.

So what

D.R. Horton is America's largest homebuilder by volume, closing on 80,276 homes in the last 12 months. Given the recent boom in housing prices and low housing supply across the U.S., D.R. Horton's business has done well in recent quarters. In the third quarter of 2021, which covered the three months ending June 30, revenue was up 35% to $7.3 billion, pre-tax profit margin was up 490 basis points to 19.4%, and net income was up 77% to $1.1 billion. This impressive growth has driven D.R. Horton stock higher, putting shares up more than 50% year to date at one point in 2021.

A home being built.

Image source: Getty Images.

However, with a tight labor market (houses don't build themselves) and disruptions to supply chains in 2021, D.R. Horton decided to lower its full-year 2021 guidance in September. It now expects to close on 81,300 to 81,700 homes in fiscal year 2021 (which ended in September), compared to the previous guidance of 83,000 to 84,500 it gave at the end of Q3.

With rising home prices, D.R. Horton is now expecting home sales gross margin to rise, which will offset any negative effect to earnings the closed home figure has. Even so, this downward move in guidance likely spooked investors and could have them concerned about D.R. Horton's earnings power over the next few quarters.

Another stat that might be causing this sell-off is the St. Louis Fed's Monthly Supply of Houses. Late last year and in early 2021, the monthly supply of houses in the U.S. was at record lows of around 3 to 4. However, this summer, it skyrocketed back to around pre-COVID levels of about 6. This doesn't mean D.R. Horton has no houses to build but that the supposed COVID-induced housing boom might not be as strong as previously suspected.

Now what

At a market cap of $30 billion, D.R. Horton trades at a price-to-earnings ratio (P/E) of less than 10. This indicates that investors are not confident in the sustainability of D.R. Horton's earnings power, since this P/E is much lower than the market average.

If you believe the recent rise in housing prices is here to stay and that D.R. Horton will continue growing the number of homes it builds after these supply chain disruptions abate, then now could be a good time to buy this stock at a discount.

Brett Schafer 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.

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