D.R. Horton, Inc. (NYSE: DHI) is the largest homebuilder in the United States. D.R. Horton’s stock has been on a tear recently, with its stock price hitting a new 52-week high following a better-than-expected earnings announcement. D.R. Horton’s earnings for the third-quarter fiscal 2024 results revealed strong financial performance and a solid strategy for navigating current market challenges, suggesting continued growth and robust shareholder returns.

A Look at D.R. Horton's Performance

D.R. Horton's financial report for the third quarter highlighted several key metrics that underscore the company's financial health. Earnings per share (EPS) came in at $4.10, exceeding D.R. Horton’s analyst community’s expectations of $3.75 by $0.35. Revenue for the quarter reached $9.97 billion, surpassing the consensus estimate of $9.61 billion. The company also exceeded expectations for homes closed, delivering 24,155 new homes, a 5% increase year-over-year, compared to analyst expectations of 23,500 homes. These positive results indicate that D.R. Horton is effectively navigating the challenging market environment within the real estate sector.

However, the company's sales orders, a key indicator of future growth, were slightly below expectations. D.R. Horton recorded 23,001 new sales orders with a total value of $8.7 billion, falling short of the 24,664 orders and $9.31 billion in value predicted by analysts.

D.R. Horton's Strategy

Despite the economic challenges, the company's management highlighted their optimism about the housing market. They stated, "Although inflation and mortgage interest rates remain elevated, the supply of both new and existing homes at affordable price points is still limited, and demographics supporting housing demand continue to be favorable." This suggests that D.R. Horton believes the housing market's fundamentals will remain strong.

D.R. Horton employs a strategic approach centered on price and pace adjustments to address the current affordability challenges. The company is focused on maximizing returns at the community level, carefully balancing price with sales pace to achieve optimal results.

A vital element of the company's strategy is its focus on improving inventory turnover and shortening construction cycle times. D.R. Horton has seen significant progress in this area, with cycle times now below their historical average. This is attributed mainly to the company's consistent production and market scale, allowing it to secure necessary labor and resources. By optimizing these areas, D.R. Horton can manage its inventory more efficiently, leading to faster returns and increased cash flow.

A Focus on Shareholder Returns

D.R. Horton's commitment to shareholder returns is evident in its strong capital allocation strategy. The company's financial position is solid, characterized by low leverage and significant liquidity. This allows D.R. Horton to adapt to changing market conditions and make strategic investments.

The company recently announced a new $4 billion share repurchase authorization, signaling its intention to increase shareholder returns further. This authorization has no expiration date, suggesting a long-term commitment to reducing shares outstanding. D.R. Horton's dividend, which has been consistently increasing over the last several years, is another component of its shareholder return strategy.

D.R. Horton's Rental Business

D.R. Horton's rental business segment is a key growth driver for the company. It has seen significant expansion in both single-family and multifamily rental properties. The company's approach to this segment is focused on building purpose-built rental communities and selling them to investors. This strategy offers several benefits, including enhanced purchasing scale and opportunities for efficient utilization of resources.

The company's current inventory balance for the rental business is about one-third single-family and two-thirds multifamily. While the current mix is weighted towards multifamily, D.R. Horton expects this to shift slightly towards single-family rental in the future. However, the company has yet to determine a target balance for the mix, as it depends on market demand and community-level considerations.

D.R. Horton's Land and Lot Strategy

D.R. Horton's land and lot strategy is crucial to its success. The company maintains a significant owned and controlled lot position, with over 630,000 lots at the end of the third quarter. A key aspect of this strategy is the company's close relationship with Forestar Group Inc. (NYSE: FOR). This publicly traded residential lot development company is a majority-owned subsidiary of D.R. Horton.

Forestar plays a vital role in D.R. Horton's land and lot strategy. It provides a substantial portion of the company's finished lots for its homebuilding and rental operations. This partnership allows D.R. Horton to maintain a consistent supply of lots, mitigating the risk of delays and cost increases that can arise from land shortages.

While D.R. Horton's reliance on Forestar is significant, the company also leverages a network of lot development partnerships nationwide. This strategy has proven successful, enabling D.R. Horton to access a broader range of lots, diversify its land holdings, and increase flexibility.

However, D.R. Horton acknowledges that lot costs are rising, and the company does not expect this trend to moderate significantly in the near future. Lot costs are a crucial driver of overall homebuilding costs and represent a significant headwind for homebuilders. The company's ability to manage these rising costs effectively will be a critical factor in its future profitability.

Community Count Growth

D.R. Horton's community count has expanded significantly in recent years, playing a crucial role in its market share gains. While the company expects this growth to be moderate, it is committed to maintaining a healthy pace of community expansion to fuel its ongoing development.

D.R. Horton is strategically expanding into new markets, often accompanied by acquiring land and lots. This strategy provides the company with a steady supply of new communities to develop, further strengthening its position as a market leader.

A Strong Contender in the Housing Market

D.R. Horton's recent performance highlights its strong financial foundation, strategic approach to market challenges, and continued growth potential. The company's focus on shareholder returns through share repurchases and dividends, its expanding rental business, and its commitment to community count growth make it a compelling stock for investors interested in the housing market. D.R. Horton's solid performance and strategic vision make it a strong contender in the housing market, positioned for continued success.