On Wednesday, Citi revised its price target for D.R. Horton (NYSE:DHI), a prominent home construction company, to $185 from the previous $186, while keeping a Neutral rating on the stock. The adjustment follows D.R. Horton's fourth fiscal quarter performance, which did not meet expectations, and a forecast for fiscal year 2025 that was seen as underwhelming by the market.
D.R. Horton's shares experienced a 7% drop after the company reported its financial results for the fourth fiscal quarter and provided guidance for the upcoming fiscal year that fell short of long-term growth targets.
The company's gross margins decreased by 40 basis points quarter over quarter due to increased price incentives, which are expected to rise further in the first fiscal quarter, with an additional 110 basis point reduction anticipated.
Despite the challenges, D.R. Horton plans to continue returning cash to shareholders through increased dividends, which rose 33% in the fourth fiscal quarter, and through share repurchases, which are expected to grow by 34% year over year to $2.4 billion in fiscal year 2025.
The company's volume expectations for fiscal year 2025 indicate a 0-3% year-over-year increase, which is below the approximately 10% long-term growth target and not as optimistic as the preliminary outlooks of 5-10% year-over-year growth provided by its peers.
Citi has also adjusted its earnings estimates for D.R. Horton for fiscal years 2025 and 2026 to reflect the fourth fiscal quarter results and the updated price and volume outlook for 2025. The new estimates are set at $2.55 and $2.40 for fiscal years 2025 and 2026, respectively. The firm applied a 2.2x next twelve months tangible book value multiple to these updated estimates, leading to the new price target of $185.
Citi's neutral stance is maintained in light of potential pricing risks as the 2025 spring selling season approaches.
In other recent news, D.R. Horton's third fiscal quarter earnings per share (EPS) of $4.10 exceeded projections, attributed to increased homebuilding gross margin and average selling price, along with improved rental pre-tax income.
D.R. Horton also finalized the sale of $700 million in senior unsecured notes with a 5% interest rate, due in 2034, and initiated a new share repurchase program worth up to $4 billion.
The optimistic outlook for the housing sector is also reflected in the surge of major US homebuilders' stocks, driven by the Federal Reserve's decision to implement a significant interest rate cut. This move is expected to stimulate the housing market by reducing mortgage rates in the coming months.
D.R. Horton also amended its existing master repurchase agreement through its wholly-owned subsidiary DHI Mortgage Company, Ltd., extending its term and continuing to provide financing for its mortgage operations.
These recent developments have led Jefferies, a financial services company, to maintain a Buy rating on D.R. Horton, adjusting its EPS forecasts accordingly.
InvestingPro Insights
To complement Citi's analysis, InvestingPro data offers additional insights into D.R. Horton's financial position. The company's market capitalization stands at $54.22 billion, reflecting its significant presence in the home construction industry. D.R. Horton's P/E ratio of 12.58 suggests that the stock is trading at a relatively modest valuation compared to its earnings, which aligns with Citi's neutral stance.
InvestingPro Tips highlight D.R. Horton's strong dividend history, having raised its dividend for 11 consecutive years. This is consistent with the company's recent 33% dividend increase mentioned in the article. Additionally, the stock has shown a high return over the last year, with InvestingPro data indicating a 65.17% price total return over the past 12 months.
Despite the recent challenges outlined in the article, InvestingPro Tips note that D.R. Horton operates with a moderate level of debt and has liquid assets exceeding short-term obligations, which could provide financial flexibility as the company navigates the current market conditions.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for D.R. Horton, providing a deeper understanding of the company's financial health and market position.
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