Economic indicators are pointing to a potential cooling-off period as job growth moderates and unemployment edges up. This shift could prompt the Federal Reserve to consider interest rate cuts, a development that could significantly benefit homebuilders like D.R. Horton (DHI). In today’s FA Alpha Daily, we explore the implications of a potential slowdown and why D.R. Horton is well-positioned to capitalize on the opportunity.
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The economy may be starting to cool down and one of the best indicators for this is the employment and job growth data.
Although nonfarm payrolls surpassed the consensus, adding 209,000 jobs compared to the expected 205,000, it was lower in June compared to the 306,000 jobs added in May. This marks a notable slowdown in job creation.
Additionally, unemployment ticked up to 4.1% from 4% in the previous month, signaling potential softening in the labor market.
If these are early signs of an economic slowdown, it might mean that the Federal Reserve is one step closer to its goal of reining in inflation, which could lead to interest rate cuts.
Many industries are eagerly anticipating such news, but one industry in particular gets our attention: homebuilders.
They have benefited from the fact that homeowners are not selling when mortgage rates are high. This has created a tight housing supply, driving up home prices and benefiting builders like D.R. Horton (DHI), which continues to see robust demand.
As the largest homebuilder by volume, the company has a national footprint with operations across 119 markets and 33 states.
This scale allows it to better navigate challenges like rising costs and supply chain issues compared to smaller peers.
D.R. Horton also builds single-family and multifamily homes across a wide range of price points from entry-level to luxury, providing diversification. Its financial services segment further enhances profitability.
The chronic housing shortage in the U.S. remains unresolved even after years of underbuilding. As of April 2024, the total housing inventory was near record lows, leaving ample demand potential for builders like D.R. Horton.
The company follows a capital-light operating model, investing in land, lots, and development opportunistically based on local market conditions. This allows it to quickly scale up production and capture more demand if it arises.
Many homeowners may list their homes if mortgage rates fall below 4%, unlocking more existing home sales. D.R. Horton is well equipped to absorb an uptick in demand from both first-time and move-up buyers.
The company delivered solid results in the second fiscal quarter of 2024. Consolidated pre-tax income increased 23% to $1.5 billion on a 14% increase in revenues to $9.1 billion, with a pre-tax profit margin of 16.8%.
Although inflation and mortgage interest rates remain elevated, the company’s net sales orders increased 46% from the first quarter and 14% from the prior-year quarter, as the supply of both new and existing homes at affordable price points is still limited, and demographics supporting housing demand continue to be favorable.
Despite these factors, the market is still pessimistic and expects the company’s Uniform return on assets ‘’ROA’’ to fall from 18% to 8%.
The company’s healthy financial position, with low debt and high liquidity, ensures it has the resources to capitalize on opportunities in a strengthening market through increased land acquisition and development.
And with a relatively inexpensive valuation, it can offer investors a great upside if the Fed signals slowing hikes or rate cuts in the coming quarters.
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at Valens Research
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