Despite higher interest rates and economic uncertainty, the housing market has held up quite well due to a low supply of homes and favorable demographic factors supporting housing demand. One homebuilder that continues to perform well is D.R. Horton (DHI 0.78%).
Last year, CEO Warren Buffett and his team at Berkshire Hathaway opened new positions in homebuilders, including D.R. Horton. However, its position didn't last long, and in the fourth quarter, Berkshire closed out its stake in D.R. Horton. Should investors follow Buffett's lead, or is D.R. Horton a good stock for the long haul? Let's dive in and find out.
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D.R. Horton is a titan in the U.S. homebuilding industry
D.R. Horton is the largest home builder in the U.S. in total volume. In its four-decade history, the company has closed more than 1 million homes and has been the largest homebuilder in the U.S. since 2002. The company primarily constructs and sells single-family homes across 118 markets in 33 states, with Texas and Florida being some of its largest markets.
The company primarily makes money building and selling single-family homes but also constructs townhouses and duplexes, and operates a rental segment where it constructs singe and multifamily properties, and sells them in bulk.
The homebuilder has been a stellar long-term performer
When investing in homebuilders, investors should be aware of the cyclical nature of the business. Cyclical stocks tend to follow alongside the cycle of economic expansion and recession, performing very well during expansion and suffering more during economic pullbacks. Homebuilders tend to rise alongside real estate prices, which can be an ongoing source of growth because home values (almost always) appreciate in the long run, although challenging periods like those in 2008 can weigh heavily on the company.
Despite the cyclicality of the homebuilding industry, D.R. Horton has been a stellar long-term performer. Over the past two decades, including the housing market crash of 2008, the stock has delivered investors a solid 10% annualized return. Long-term trends such as growing populations in the U.S. and rising real estate values are strong, long-term tailwinds for homebuilders like D.R. Horton.
DHI Total Return Level data by YCharts.
Solid financial results continue
Last year, D.R. Horton earned $35.5 billion in total revenue as robust demand for homes during its fiscal year (ending Sept. 30, 2023) increased net-sales orders by 3%.
Inflationary pressures and high mortgage-interest rates weighed on its business early in the fiscal year. However, demand improved in the second quarter of last year thanks to seasonal factors, along with incentives and pricing adjustments by D.R. Horton to adapt to changing market conditions. This helped boost sales but resulted in lower margins and its net income fell 19% year over year.
In Q1 (ending Dec. 31, 2023), D.R. Horton saw its number of closed homes increase by 12%, home sales increase by 8%, and revenue increase by 6%. Although it had a solid quarter, its operating margins and net income fell slightly as it continued offering incentives and adjustments.
What's next for D.R. Horton
Multiple factors could impact homebuilders in the near term. For example, higher interest rates have caused the value of homes to drop. According to data from the St. Louis Federal Reserve Bank, the median sales price of houses in the U.S. was $417,700 in Q4, down from its peak price of $479,500 just one year earlier. In addition, the company noted that "economic uncertainty may persist for some time," which could also weigh on buyer demand. The company raised its revenue guidance slightly for the year by $300 million and implied revenue growth of around 3%.
Despite these near-term headwinds, long-term factors should continue to favor D.R. Horton's core business. According to a recent analysis by realtor.com, the U.S. housing market continues to be short about 2.5 million homes. This shortage is due to a decade of underbuilding relative to population growth, and it will take some time to make up the gap.
Is it a buy?
D.R. Horton is a quality company that could face near-term headwinds from high interest rates and falling home prices. However, the stock trades at a reasonable valuation of 11.1 times earnings. It should continue to benefit from favorable trends behind its business, making the stock a solid one to buy and hold long term.
