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Will D.R. Horton Stock Reach a New High?


As uncertain as the signals within the housing market, stocks like D.R. Horton (NYSE: DHI) have been rallying to new highs. The rally is driven by strong performance in the face of rising rates and falling mortgage demand, and it may continue. The Q3 report shows the same strength, but there is a caveat.Key Points

D.R. Horton had an impressive quarter, but shares fell more than 4.0%. 
The pace of new orders increased but was not enough to offset the decline in previous quarters. 
Analysts have supported the rally, but the stock appears overbought and overpriced. 
5 stocks that are preferred over D.R. Horton
While the Q3 results continue to show strong performance, signs of weakness are growing. The strength in the housing market is influenced by several factors outside the control of the homebuilders, including interest rates. 
High-interest rates lead to existing homeowners holding back from selling and make it increasingly difficult for new buyers to enter the market. This, combined with declining backlogs, indicates a potential slowdown in the homebuilding industry that could start anytime.
Based on the outlook for the FOMC (Federal Open Market Committee) policy trajectory, this slowdown could begin in the summer and worsen throughout the year. The FOMC is expected to raise rates by at least 25 basis points.
This puts average 30-year mortgage rates back in the 7.5% range, which has caused buyers to pull back in the past.
The only positive aspect of this outlook is that rates may start to decrease by the end of the year. However, even that has its downside. Falling rates could lead to a surge in existing home sales, flooding the market with inventory and reducing demand for new homes.
And all of this is assuming there isn’t a recession. So while the homebuilders and D.R. Horton are currently showing strength, there is a high likelihood that this strength won’t last.
D.R. Horton Has Impressive Quarter 
D.R. Horton had an impressive quarter. The company reported $9.73 billion in net revenue, an 11% gain compared to last year. This goes against expectations for revenue to decline year-over-year and surpasses the consensus estimate by 1500 basis points. Volume and pricing showed strength, increasing by 8% and 4% respectively, contributing to improved profitability.
The GAAP (Generally Accepted Accounting Principles) EPS of $3.90 is $1.11 higher than expected, a difference of about 4000 basis points. However, there is a catch. Expense increases outpaced revenue growth and impacted earnings. The GAAP EPS is down 16% year-over-year. Guidance is positive, with the company expecting revenue to reach at least $34.2 billion compared to the previous high of $32.34 billion, although this could be a conservative estimate.
Rising interest rates could lead to accelerated sales as buyers try to secure rates before they increase further. In this scenario, the anticipated housing market contraction would occur sooner.

Analysts Are Limiting Gains for D.R. Horton 
Analysts have supported the upward trend in D.R. Horton’s stock, but the trend has outpaced their targets and appears to be overvalued. The consensus sentiment on MarketBeat.com has slipped from Moderate Buy to Hold over the past year, and the price target of $118 is below the current trading price.
The most recent targets are on the higher end of consensus, but even at $120, there isn’t much upside potential. Unless this changes, it is unlikely that DHI stock can increase much further.
DHI stock surged the week before the Q3 release, reaching a new all-time high. However, the post-release action has caused the market to fall from that high, indicating significant resistance at this level. Without another catalyst, breaking above $130 will be challenging. In this scenario, the stock could continue to trade within a range at current levels.
Before considering D.R. Horton, it is important to consider that while MarketBeat keeps track of Wall Street’s top-rated analysts and the stocks they recommend, D.R. Horton was not included in their top recommendations. While D.R. Horton currently has a “Hold” rating among analysts, top-rated analysts believe there are better investment opportunities in other stocks.

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