Argus Analyst Moves up to D.R. Horton

08/24/2020 6:00 am EST


Chris Graja

Senior Analyst: Retail, Argus Research Corporation

The housing market -- a major pillar to solid U.S. economic growth before COVID-19 — is starting to rebound after an initial slump related to the onset of the pandemic, asserts Chris Graja, an analyst with Argus Research, a leading independent Wall Street research firm.

Building permits, which are a leading indicator for the industry, peaked in January at 1.55 million units and are now down 19% (data through June). But they have risen 18% from April’s lows.

Existing home sales, which were down 32% in May from January, have started to rise as stay-at-home orders have been lifted; they were up 20% month-to-month in June. Prices have held up — so far.

The S&P/Case-Shiller National Home Price Index is one of the most closely watched barometers of the housing market. Data for May 2020 showed that prices gained 4.5% year-over-year, up from a rate of 3.9% in January.

Meanwhile, inventory levels are tight: currently there is a 4.7-month supply of existing homes for sale (the average range is 4.5-7.5 months), according to the U.S. Census Bureau.

We think that on the other side of the pandemic, demand for homes — with yards between neighbors and no elevator buttons to press — will again be strong.

We are maintaining our "buy" rating on Focus List selection D.R. Horton (DHI). The company is one of the largest U.S. homebuilders based on homes delivered and revenue.

While the path of the coronavirus and the pace of any economic recovery remain unclear, homebuilding has been designated an essential activity in most municipalities, and construction has been allowed to continue.

Mortgage rates remain very low, and the housing market should be aided by favorable demographics and years of underinvestment. This crisis has reinforced the value of a safe home with a little space to work, exercise, and relax at a safe distance from neighbors.

We expect large builders to take market share from smaller builders. We look for DHI to benefit from its range of brands for high-end and especially entry-level homebuyers.

D.R. Horton should also benefit from its broad geographic diversification and healthy balance sheet. DHI is one of very few homebuilders with investment-grade credit ratings from both Moody's and S&P.

We are raising our FY20 EPS estimate to $5.60 from $4.77. We are also boosting our FY21 EPS estimate to $5.60 from $5.00, reflecting an increase in our revenue forecast. Our long-term earnings growth rate estimate is 9%. We see this as a post-recovery growth rate for a few years.

We believe that the supply of affordable homes remains low and we think that DHI's national presence will allow it to move production to the most promising markets and that its successful designs for value-conscious buyers will help it to gain market share.

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