If you are wondering why shares of D.R. Horton (NYSE: DHI) stock shot up more than 10% in the wake of the Q4 results it wasn’t because of the results. The stock shot up more than 10% on a knee-jerk reaction to some news that is, ultimately, bad news for D.R. Horton. That news? The CPI for October. It came in below expectations and showed what the media calls cooling but is really a slowing of growth.
The CPI news means the FOMC may be able to slacken the pace of their interest rate hikes which is where the bad news for D.R. Horton and its brethren in the housing business comes into play. The CPI is still above 7.0% headline and 6.0% core on a YOY basis which means the FOMC will continue to hike rates, if at a slower than 75 bps per meeting clip. This means the rate on mortgages will continue to climb into 2023 and there are already signs the damage has been done in regard to the housing market. The average 30-year mortgage has been hovering around 7.5% for the last month and that is cutting into demand. Mortgage applications in the most recent week were down 41% YOY and are expected to fall further in the coming months.
"During most of the year, demand for our homes was strong. Beginning in June and continuing through today, we have seen a moderation in housing demand caused by significant increases in mortgage interest rates and general economic uncertainty. While these pressures may persist for some time, the supply of homes at affordable price points remains limited, and demographics supporting housing demand remain favorable,” said D.R. Horton chairman Donald R. Horton.
D.R. Horton Has a Tough Quarter
D.R. Horton had a good quarter but a tough one that shows signs of peaking in the housing industry. The company reported $9.6 billion in revenue which is up 18.5% versus last year but missed the consensus by 370 basis points and there is more bad news to come. The revenue gain is driven by a 23% increase in housing revenue that was in turn driven by a much smaller increase in homes sold. The number of homes sold rose by only 6% which means higher prices are why the company is “growing” so quickly and the earrings are not impressive either. The Q4 GAAP EPS of $4.67 is up 26% versus last year on expanding margins and share repurchases but came in well below the consensus of $5.09 and the outlook for sales and profits is deteriorating in the face of high demand.
D.R. Horton declined to give any guidance for the coming year but the internal metrics do not support the idea of strength, growth or improving profitability. To start, the company’s net sales fell -15% for the quarter on a volume basis and price increases did not offset the difference. The price-adjusted sales figure is down 10% YOY and is coupled with a high and rising cancellation rate. The cancellation rate came in at 32% for the quarter which is up 800 bps sequentially (due to rising rates) and 19% versus last year. As for the backlog and the company’s cash cow, it’s down 25% YOY and shrinking so we may be seeing some layoffs in the housing industry fairly soon.
Capital Returns Help Drive DHI Price Action
D.R. Horton issued a dividend increase along with the Q4 earnings results and that may be helping with the price action. The increase is worth 10% to investors and goes ex-dividend the first week of December. Even so, the yield is only 1.35% and the outlook for next year is poor so don’t read too much into that. Otherwise, it looks like DHI shares may have already hit resistance. A move above $85 would be bullish but only if the price action closes above $85 and holds that level. Otherwise, DHI is probably range bound and may move lower before it moves much higher.