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

Despite uncertainties in the housing market, stocks like D.R. Horton (NYSE: DHI) have been experiencing a rally and reaching new highs. This rally can be attributed to strong performance in the face of rising interest rates and declining mortgage demand, and it may continue. However, there are some factors to consider that could impact the stock’s future trajectory.Key Points
D.R. Horton had an impressive quarter, but its shares fell more than 4.0%.
While the pace of new orders increased, it was not enough to offset the decline experienced in earlier quarters.
Analysts have supported the rally, but some believe that the stock is currently overbought and overpriced.
Here are 5 stocks that some analysts believe are better options compared to D.R. Horton.
While the Q3 results continue to show outperformance, there are signs of weakness emerging. The strength in the housing market is influenced by factors beyond the control of homebuilders, such as interest rates.
High-interest rates make it challenging for existing homeowners to sell their properties and deter new buyers from entering the market. This, along with the decreasing backlogs, indicates a potential slowdown in the homebuilding industry, which could begin at any time.
Based on the anticipated trajectory of the Federal Open Market Committee (FOMC) policies, this slowdown may start in the summer and worsen throughout the year. The FOMC is expected to raise interest rates by at least 25 basis points.
As a result, the average 30-year mortgage rate could reach around 7.5%, causing buyers to pull back as seen in the past.
There is a slight positive aspect to this outlook, as rates may start decreasing by the end of the year. However, even this decrease poses a potential problem. Falling rates could lead to a surge in existing home sales, flooding the market with more inventory and reducing demand for newer homes.
It’s also important to consider the possibility of a recession. While D.R. Horton and other homebuilders currently display strength, there is still a high chance that this strength won’t last.
D.R. Horton’s Impressive Quarter
D.R. Horton reported $9.73 billion in net revenue for the quarter, representing an 11% increase compared to the previous year. This contradicts expectations of a revenue decline and surpasses the consensus estimate by 1500 basis points. The company saw strength in volume and pricing, with both increasing by 8% and 4% respectively, contributing to higher profits.
The GAAP EPS of $3.90 was $1.11 better than expected, or around 4000 basis points. However, there is a catch. Expense increases outpaced revenue growth, resulting in a 16% year-over-year decrease in GAAP EPS.
The company’s guidance for future revenue is positive, projecting at least $34.2 billion compared to the previous high of $32.34 billion. However, this projection could be a cautious estimate.
Rising interest rates could lead to increased sales due to front-running. In this scenario, the anticipated contraction in the market would draw closer.
Analysts Limiting D.R. Horton’s Gains
While analysts have generally supported the upward trend in D.R. Horton stock, the stock’s performance has exceeded their targets and is now considered overvalued. Over the past year, the consensus sentiment on has shifted from Moderate Buy to Hold, and the price target of $118 is below the current stock price.
Although some recent price targets are on the higher end of the consensus, even at $120, they do not offer significant upside potential. Unless this changes, it is unlikely that DHI stock can rise much higher.
DHI stock reached a new all-time high the week before the Q3 release. However, the post-release action has caused the market to drop from that high level, indicating significant resistance. Without another catalyst, it will be challenging for the stock to surpass $130. In this scenario, the stock might become range-bound at its current levels.
Before considering an investment in D.R. Horton, it’s worth noting that although the stock is currently rated as “Hold” by analysts, there are five other stocks that top-rated analysts consider to be better options.
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