On Friday, Jefferies maintained a Buy rating on D.R. Horton (NYSE:DHI) and increased its price target to $190 from the previous $168. The firm acknowledged the company's third fiscal quarter earnings per share (EPS) of $4.10, which surpassed both Jefferies' estimate of $3.98 and the consensus of $3.77.
The higher-than-expected results were attributed to an increase in homebuilding (HB) gross margin and average selling price (ASP), along with improved rental pre-tax income (PTI). These factors were slightly offset by a modest rise in homebuilding selling, general and administrative expenses (SG&A) as a percentage of sales and a decrease in financial services PTI.
Despite unit order growth falling short of expectations at 1% compared to the estimated 5%, D.R. Horton's share repurchase exceeded expectations by 10%, amounting to an additional $40 million.
Jefferies highlighted three positive drivers behind the 10% surge in D.R. Horton's shares the previous Thursday: improved traffic and order patterns towards the end of the quarter, gross margins that beat estimates, and a strong fourth-quarter guide that does not rely on lower rates to reduce sales incentives.
Additionally, D.R. Horton anticipates an increase in operating cash flow (OCF) and share repurchases in fiscal year 2025, raising its buyback authorization from $1.5 billion to $4 billion.
Jefferies has adjusted its EPS forecasts for D.R. Horton based on these developments. For fiscal year 2024, the estimate has been raised to $14.75 from $14.55, owing to the quarter's performance and the anticipation of better fourth-quarter margins.
The fiscal year 2025 EPS estimate has been slightly reduced to $16.35 from the previous industry-high of $16.40, reflecting a marginal decline in revenue projections, which is mostly compensated by an operational margin increase and a significant reduction in share count.
The firm remains optimistic about D.R. Horton's ability to outperform its competitors due to its strong local market-share positions, cost-efficient production model, geographic market diversity, and focus on affordable entry-level homes.
The company's low leverage and high returns, along with the prospect of more aggressive share buybacks, improved field conditions, and the potential for lower interest rates, are expected to contribute to an expansion in D.R. Horton's stock multiple.
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