On Thursday, Raymond (NS:RYMD) James downgraded shares of D.R. Horton (NYSE:DHI) from Outperform to Market Perform, citing increased pressures on the entry-level homebuilding market following recent election results. The firm pointed to a "higher for longer" outlook on mortgage rates and housing affordability that aligns with the market's consensus.
The downgrade comes after a volatile October and in the aftermath of Tuesday's election, which has somewhat alleviated uncertainty but presents new challenges for D.R. Horton.
The company is expected to face declining fiscal year 2025 earnings per share due to factors such as increased selling incentives for entry-level homes, potential hikes in FHA mortgage premiums, and possible delays in its high-efficiency production model, which could be impacted by the availability of foreign-born labor.
Despite these near-term pressures, Raymond James acknowledged D.R. Horton's potential for growth in its rental property platform, including multifamily and single-family rentals, albeit with potentially lower contribution margins compared to its core for-sale housing business. The firm also recognized the ongoing production deficit of single-family homes relative to household formation and D.R. Horton's capabilities to maintain its market share.
However, with earnings under pressure, D.R. Horton's valuation remaining high among its peers, and uncertainties around future housing affordability, Raymond James has opted for a cautious stance. The firm suggests taking a step back until the post-election landscape becomes clearer.
In other recent news, D.R. Horton, a leading home construction company, has reported a 12% decrease in earnings per diluted share for Q4 2024, despite a slight increase in net income for the full year. The company's pre-tax income was $1.7 billion on revenues of $10 billion for the quarter, and home sales revenue was $8.9 billion from 23,647 closed homes.
However, the average closing price saw a 1% year-over-year drop. In another development, D.R. Horton has revised its investment agreement with real estate developer Forestar Group Inc (NYSE:FOR)., raising the capital expenditure threshold for Forestar's investment decisions from $20 million to $45 million. D.R. Horton currently owns approximately 62% of Forestar's outstanding common stock. These are recent developments and are part of the company's fiscal performance.
Looking forward, D.R. Horton anticipates the spring selling season will be pivotal for the homebuilding volume and profit margins of fiscal 2025. The company plans to repurchase approximately $2.4 billion in stock and pay $500 million in dividends in the coming fiscal year. D.R. Horton continues to adapt to market conditions, maintaining a strong liquidity position with $7.6 billion, including $4.5 billion in cash.
InvestingPro Insights
Complementing Raymond James' analysis, recent InvestingPro data provides additional context to D.R. Horton's current market position. The company's market capitalization stands at $54.02 billion, with a P/E ratio of 11.57, indicating a relatively modest valuation compared to its earnings. This could be seen as attractive, especially considering the company's strong financial performance, with a revenue of $36.8 billion in the last twelve months.
InvestingPro Tips highlight D.R. Horton's resilience and market position. The company has raised its dividend for 11 consecutive years, demonstrating a commitment to shareholder returns even in challenging market conditions. Additionally, D.R. Horton is recognized as a prominent player in the Household Durables industry, which aligns with Raymond James' acknowledgment of the company's potential to maintain market share.
However, echoing Raymond James' concerns, one InvestingPro Tip notes that 10 analysts have revised their earnings downwards for the upcoming period, suggesting widespread caution about near-term performance. This aligns with the expected pressures on the entry-level homebuilding market mentioned in the report.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for D.R. Horton, providing a broader perspective on the company's financial health and market position.
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