#$dhi

EARNING UPDATE $DHI D.R. Horton, Inc. for quarter ending q_Jun18 – Revenue grew, Margins expanded

[s2If !current_user_can(access_s2member_level0)]Please login to read the earning update on DHI [lwa][/s2If][s2If current_user_can(access_s2member_level0)]D.R. Horton, Inc. reported earnings (EPS) of 1.18 per share for the quarter ending q_Jun18. This is vis-vis 0.91 per share for the previous quarter ending q_Mar18, a growth of 29.7 %. Compared to last year same quarter (q_Jun17), earnings grew…

$DHI - 10.2.2017 entry analysis

Setup: Change of the trend Flip (one of my favorite, this one can catch huge moves right from the beginning after sentiment gets changed)

Long-term view: In the middle of 2016, price made new ATH near 35. That didn’t last long and the stock retraced back to 27.

Price action: Since trump’s election, it stopped tanking lower and rather started to consolidate in a 2 points range. The whole time, volume was much higher than during the decline, signing a potential accumulation. With positive earnings, price definitely broke above the multi-month trendline and the bottoming range. I started watching it.

Entry signal: When price came back to test the prior resistance, all levels ligned up to create my AOV to trade from. Just beautiful. Weekly EMA20had time to curl up and price came back right to it (hint: that’s the typical initial pullback after breaking a trendline into the previous direction, no matter what timeframe you’re looking at). There we go, there was my AOV - wEMA20, dEMA20, prior strong resistance, gap fill... All set, waiting for my opportunity to get in.

Entry signal: Since this correction took place fairly quickly without much hesistation, I couldn’t draw my trendline. But that’s ok, because the whole situation looked perfect and odds were on my side. When I saw the engulfing candle right at the AOV, followed by that pinbar, I knew that’s my chance to get in. I set my stop order above the last short-term swing high (previous resistance) and got filled during the next strong day.

Housing prices are close to record highs as borrowing costs are just about the cheapest they have ever been. Yet despite low mortgage rates, the percentage of people owning a home is the lowest it has been in over half a century. Data from the U.S. Census Bureau show the homeownership rate below 63%, its lowest level since 1965.

“Incomes have had difficulty keeping up with the pace of house price increases,” explained Danielle Hale, director of statistics at the National Association of Realtors (NAR). “Even though jobs are growing and mortgage rates remain low, affordability is a challenge for renters across the country.”

Nonetheless, there are some markets where a sizeable percentage of renters can afford to buy the median-priced home.

City Share of renters who can afford to buy a home 1. Toledo, OH 46% 2. Little Rock, AR 46% 3. Dayton, OH 44% 4. Lakeland, FL 41% 5. St. Louis, MO 41% 6. Columbia, SC 41% 7. Atlanta, GA 40% 8. Columbus, OH 38% 9. Tampa, FL 38% 10. Ogden, UT 38%

Source: National Association of Realtors

Besides affordability, one factor for inclusion on the NAR’s list is future employment prospects.

“Each of the cities that are on this list had to have job growth that was above the national average,” Hale said.

Total US student loan debt has topped $1.3 trillion, nearly triple what it was a decade ago, with a rate of serious delinquency (at least 90 days late) that surpasses any other type of debt, according to the Federal Reserve Bank of New York.

On Thursday, Fannie Mae (FNMA) released a national housing survey with a troubling finding for some student debtors: People with high school degrees who never went to college have a better shot of owning homes than ones who took on debt to go to college but never ended up graduating.

In fact, college dropouts with some debt are 32% less likely to be homeowners than high school grads. “If you take the debt but don’t get the degree that’s a problem,” Doug Duncan, Fannie Mae’s chief economist, told Yahoo Finance.

Source: Fannie Mae

However, student debtors who finished college often fare better at homeownership than those without a college diploma. In fact, student debtors with a bachelor’s degree are 27% more likely to be homeowners than those who didn’t attend college and therefore have no student loans.

While student loan debt doesn’t ruin chances of homeownership for college grads, it may delay the timeline for a first home purchase. Student loans aren’t the only factors that can delay homeownership, though.

With homeownership at 63% today (compared to 69% a decade ago), there is a broader trend in the housing market — many people are simply buying homes later on in life. Duncan says two key factors contribute to this shift: weak income growth and lack of affordable properties.

Americans are struggling to accumulate the income necessary to be able to afford a home, according to Duncan. Additionally, construction in the housing sector has had a slow rebound. The prices of single-family entry-level homes — to the extent they exist — have been increasing the fastest of any group.

“The biggest inhibitor today is simply the lack of entry-level housing so that the 90%+ of millennials who eventually want to become homeowners [can do so],” Duncan says. “There needs to be some expansion on the supply side for them to be affordable.”

Moreover, rentals being built are higher cost properties, which means people are paying steep rental prices. Higher rents, Duncan points out, inevitably slow the pace at which people can actually accumulate savings to buy a house of their own.

Melody Hahm is a reporter at Yahoo Finance. Read more from her:

I checked out WeWork’s ‘communal housing,’ and now I’m considering a move

The summer weekend getaway for New York’s super-rich is cooling off

Malcolm Gladwell sees one good thing about a Trump presidency

Monday, November 9

Tuesday, November 10

Thursday, November 12

Rackspace Hosting (RAX)

Information Technology - Internet Software & Services | Reports November 9, after the close.

The Estimize community is looking for EPS of $0.22, only a penny better than Wall Street. Estimize is also looking for higher revenues of $504.44M vs. the Street’s $503.60M.

What to watch: Even though Rackspace is considered one of the first to get into the cloud industry, first movers advantage hasn’t helped this stock which has fallen nearly 42% since the beginning of the year. In order to differentiate itself in a very crowded market, RAX recently reorganized its business model to include computing and support.  Behemoths such as Microsoft, IBM and Alphabet (Google) are all making a play for cloud computing, with Amazon really owning the space at this point, their Amazon Web Services makes up 25% of the market. Price competition has gotten incredibly stiff, with Rackspace still charging higher prices than its peers. To remain afloat Rackspace recently announced a partnership with Amazon, which still wasn’t enough to buoy the stock. At nearly 30 times forward earnings, a rich valuation doesn’t seem justified at this point given current fundamentals. Any improvement in share price this year relies on Q3 numbers coming in ahead of expectations.

DR Horton (DHI)

Consumer Discretionary - Household Durables | Reports November 10, before the open.

The Estimize consensus calls for EPS of $0.65, three cents better than what Wall Street is looking for. Revenues are in-line at $3.055B.

What to expect: This week we get a read on the health of the US consumer and their willingness to purchase large ticket items such as homes when DR Horton reports. Housing had a robust summer season, with signs that that could potentially be breaking down. While Housing Starts came in much stronger than expected in September driven by a spike in multi-family units, that was offset by a decline in permits. New home sales also fell in September, and supply surged to 5.8 months from 4.9 months in August and 5.5 months in September last year. As the biggest home builder in the country, DHI is expected to benefit from a housing market that stayed strong in Q3. While it is exposed to nearly every US region, it has minimal exposure to Northeast which has been performing the worst and saw New Home Sales decline 62% in September. Overall investors should look for guidance around the housing market for the last quarter of the year when DR Horton reports tomorrow. A recent reading of Home Builders Sentiment showed continue confidence surrounding the strength of housing, coming in at 64 in October, up from 61 in September.

Cisco Systems (CSCO)

Information Technology - Communication Equipment | Reports November 12, after the close.

The Estimize community is looking for EPS of $0.57, only a penny better than the Wall Street consensus. Revenues are also fairly muted at $12.698B vs. the Street’s consensus of $12.636B.

What to watch: Despite meeting or beating top and bottom-line expectations for the last two quarters, low single digit growth for both of those metrics has left much to be desired from the communications equipment giant. However, Cisco is still a leader in its industry, and has been making strategic investments to remain so. Specifically, analysts are expecting impressive growth out of its next-gen firewall business. The rollout of its 100G+ data center platforms is anticipated to occur in 2016, through which the company will be focusing on its increasing cloud customer base, expecting growth in bookings for its Meraki Cloud Services. Analytics tools will also be a main focus, especially with a new partnership with Paxata and investments to drive automation for data centers. The company’s infrastructure currently routs 80% of global internet traffic.

Fossil (FOSL)

Consumer Discretionary - Textiles, Apparel & Luxury Goods| Reports November 12, after the close.

The Estimize consensus calls for EPS of $1.14, only a penny higher than what the Street is expecting. Revenues are expected to come in at $785.14M as compared to the sell-side consensus of $784.75M.

What to watch: Fossil has an impressive portfolio of brands such as Michael Kors, Tory Burch, Armani, and the newly signed license with Kate Spade, creating the watches, jewelry and small leather goods for these designer brands. However, their biggest brand, KORS has seen a decline in demand for their watches over the last year, despite beating expectations in their latest report. But as tastes change and the US consumer becomes very particular with how they allocate their discretionary income, Fossil remains very cautious. In their Q2 report the company warned that Q3 2015 would be their weakest quarter of the year due to difficult year-over-year comparisons. One concern this quarter is around sluggish international sales, specifically in China and Europe, being further exacerbated by the strong US dollar. One bright spot could be the company’s investments in wearable technology in the form of smart watches.

El Pollo Loco (LOCO)

Consumer Discretionary - Hotels, Restaurants & Leisure | Reports November 12, after the close.

The Estimize community is looking for EPS of $0.17, two cents higher than the Wall Street expectation. Estimize is also looking for slightly higher revenues of $90.48M vs. the Street’s $90.49M.

What to watch: Since going public in July 2014, El Pollo Loco’s main goal (along with several others in the fast casual space) has been to reach the the status of Chipotle as a stellar performer and darling of the industry. With 4 quarters as a publically traded company under its belt, this doesn’t seem as though it’s in the immediate future for LOCO. For each of the quarters the Mexican-inspired chain has just barely met or missed both top and bottom-line expectations. Despite having over 400 locations, the chain has not done well with its regional distribution, with about 86% of all restaurants located in California. Same restaurant sales, which really should be on fire at this stage, fell 0.5% last quarter, caused by a nearly 4% decrease in traffic but partially offset by a 3.4% increase in average check. Plagued by massive debt at the time of its IPO, El Pollo Loco has never quite been able to recover, and meager customer traffic and same store sales figures have not been enough to overcome the debt situation. With its stock down 42% this year alone, this restaurant is going to have to put up a positive surprise when they report on Thursday.

Get your estimates in here!

Rising wages, a tighter labor market, the wealth effect from tremendous stock and bond market gains, Millennials turning mid-30’s, pent-up home-shoppers coming out after a terrible winter – these are all the ingredients for a ballistic housing market, not unlike the one I had guessed we would see this spring (see my February story at Fortune here).

Last week, we got data on new single-family home starts that was just incredible – a 22% gain over the prior year. This week, we heard this about homes under contract as of April (via Barclays):

Pending home sales rose 3.4% m/m in April, coming in a bit above our forecast (3.0%) and well above consensus expectations (0.9%) for only a modest rise. The strength in April pending sales was broad-based, with gains led by the Northeast (10.1%) and Midwest (5.0%). Sales activity in these regions was hard hit by adverse weather in Q1 and the strength in April pending sales suggests a boost to regional existing home sales in the coming months. Gains in the Midwest (5.0%) and South (2.3%) were more modest, though these regions did not recently experience declining sales. The April data leave total pending sales up 13.4% y/y and, on balance, are supportive of our expectation of a solid Q2 rebound in residential investment.

As you can see, we’re back above pre-crisis levels. Residential housing has indeed gone ballistic this spring:

Source:

Update: US pending home sales post solid advance in April Barclays – May 28th 2015

I posted the following chart of the current 30 year fixed rate mortgage on Twitter last week:

I said that today’s roughly 3.5% mortgage rates are going to look silly someday so not all of the low interest rate policies have hurt savers that can take advantage. If you’re able to lock in low interest rates you can also lock in future savings for many years to come. This chart led to a discussion about the pros and cons of a 30 year fixed rate mortgage since many countries do things much differently than the U.S.

Pros:

You can plan ahead for the future. You know exactly what your payment will be every single month. During the real estate bust, many that went with adjustable rate mortgages didn’t plan on a reset to higher rates and it cost them.

A mortgage works like a callable bond, so you’re able to refinance to a lower interest rate if they should fall.

If interest rates rise, you still get to pay the lower than market interest rate.

By spreading a loan over a 30 year period, you’re able to make a large purchase that you wouldn’t normally be able to make.

You can write off the mortgage interest for a tax break.

You can pay off the loan early to decrease overall interest charges.

Cons:

Refinancing isn’t free as you have to pay closing costs and each time you re-fi it resets the term of the loan. As rates have fallen drastically over the past thirty years, locking in fixed rates would have meant constantly refinancing and incurring closing costs to take advantage of the new lower rates.

If you don’t pay off your mortgage early you end up paying a huge amount in interest costs over the term of the loan. The median home price in the U.S. is roughly $200,000. Over 30 years at a 3.5% fixed rate mortgage you’ll end up paying almost $125,000 in interest over the course of the loan. At a 6% mortgage rate, the total interest cost comes to more than $231,000, more than the actual mortgage itself.

The majority of the interest costs come in the early years of a loan so it takes time to build equity in your home. Roughly 30% of interest costs are paid in the first 5 years of a 30 year loan.

The last item on the cons list really matters for those who don’t stay in their house long enough to build equity by moving around or trying to move up to a new house in a short period of time. Ryan Harvey shared with me a blog post he wrote a few years ago that detailed the other costs that come into play with home-ownership above and beyond the initial interest payments. Here’s Ryan:

This is one of the reasons I’ve always been against buying a starter home when you’re young. It’s going to be nearly impossible to build equity in your home on a net basis after accounting for all costs if you try to jump from house to house in short order.

Young people think they’re throwing money away when they rent because your “paying someone else’s mortgage.” What most don’t consider is the total expenses that come into play from homeownership, including the costs of a mortgage and all of the incidentals in the first few years.

A 30 year fixed rate mortgage isn’t perfect. It’s possible interest rates could continue to fall. Mortgage rates are already near zero in some European countries. If you don’t pay off your mortgage early you’ll end up paying the bulk of your mortgage in interest rate costs. If you move after just a few years you’ll almost certainly lose money on the purchase and sale.

The problem with all of this is that a home is perhaps the most emotional purchases most people will make in their lifetime. This is why so many people run into financial ruin because of a poor real estate decision. I’m not sure many people take into account mortgage rates when looking to purchase a home for themselves and their family. A home offers a kind of psychic income that’s difficult to quantify. Few people consider spreadsheets when purchasing a home.

But for those that plan on staying in one place for a number of years, would like to have some certainty from a financial planning perspective and understand the dynamics of the real estate market, locking in an interest rate in the 3-4% range will probably look like a pretty good deal in the future.

Source: On Buying a House With Your Girlfriend (Ryan Harvey)

Further Reading: My Advice to Young Real Estate Investors Point/Counterpoint on Real Estate as an Investment Option

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This post from Ben Carlson (@awealthofcs) originally appeared on A Wealth of Common Sense.

Summary

The company released earnings on Monday and smashed analyst estimates on both the top line ($2.253B vs. $2.111B estimate) and bottom line ($0.39 EPS vs. $0.35 estimate). Stock rose 5.5%.

D.R. Horton looks very attractively valued on a revenue, earnings, and book value relative basis.

The stock outperformed in 2014 after a strong second half of the year. The stock also boasts solid EPS growth and return on equity numbers.

We rate DHI as a 'BUY' and expect the stock to see moderate outperformance in 2015.

A) Introduction

D.R. Horton (NYSE:DHI) is the biggest builder of homes in the United States, servicing the entire spectrum of customers from affordable housing through their Express Homes segment to high-end homes through their Emerald homes segment. The company released earnings on Monday and smashed analyst estimates on both the top line ($2.253B vs. $2.111B estimate) and bottom line ($0.39 EPS vs. $0.35 estimate). The company saw its stock price rise accordingly, gaining 5.5% on big volume. The stock gave up most of those gains on Tuesday, after Citi downgraded their stock from a Buy to Neutral, though the stock recovered to finish down less than a percent. In this article we'll outline why DHI offers good value as well as price momentum, EPS growth, and return on equity. These metrics are the ingredients to outperformance, and DHI's statistical profile makes it prime candidate for outperformance in 2015.

The report will start with a breakdown of DHI's valuation profile, followed by an analysis of the price and profit growth, and concluding with some qualitative analysis and conclusions. We take a quantitative approach to investing, preferring to focus our analysis on metrics that have strong predictive ability. Thus, we tend to analyze academic papers and perform historical back tests on different metrics before including them in our analysis. We will provide links to the academic papers we draw inspiration from as we progress through our breakdown of the stock so investors can see for themselves what we base our conclusions on.

B) Valuation Breakdown

We'll start by analyzing DHI's value profile. This is important to look at as Nobel laureate Eugene Fame found that "value stocks (with low ratios of price to book value) have higher average returns than growth stocks (high price-to-book ratios)". DHI's valuation profile is shown below:

Source

As you can see in the table above, DHI has very favorable value metrics relative to its industry group, sector, and overall market. On a revenue basis, DHI's sales yield of 90% is higher than each of its industry group (84%), sector (58%), and overall market (4%) averages. It bears mentioning that both its industry group and sector look very attractive relative to the overall market. Consumer discretionary has been one of the weakest sectors in the current bull market and may represent one of the last avenues of value left in the market. This observation holds on an earnings basis, with DHI's earnings yield of 6.2% being higher than its industry group (4.4%) and sector (2.1%) averages. The stock looks relatively cheap with a price/book of 1.74 especially when the overall market is commanding a +5 price/book. Overall, we rateD.R. Horton as "Undervalued" and expect the stock to outperform the market by 3.74% because of this undervaluation.

C) Growth Profile

There are a variety of different growth metrics that have been shown to predict stock returns. Most important among them is price momentum. Winning stocks keep winning, and losing stocks tend to keep losing. DHI's growth profile is shown below:

Source

DHI started 2014 off relatively slowly, but had a big second half of the year (gaining 13.5% over the last 6 months). This mirrors the rally in the overall consumer discretionary sector, which gained 7.7% over that same time frame on average versus 1.9% for the entire market average. DHI outperformed the market over the last twelve months, gaining 18% versus 3.5% for its industry group, 11% for the consumer discretionary sector, and 6.4% for the overall market average. On an EPS growth basis, DHI falls within the top half of the entire market (barely) with annual EPS growing 13%. The stock's ROE (14%) and ROA (7%) are both solid, and mirror the averages for its industry group (15% & 6%). We rate DHI as a growing, albeit weakly, company. We expect the company to generate a modest 1.84% of outperformance over the market due to its moderately favorable growth metrics.

D) Qualitative Analysis & Conclusion

We'll now supplement our quantitative analysis with a qualitative discussion of some of the major growth catalysts and risk factors that could impact the stock price in the near future. Through reading the earnings call transcript from Monday's earnings release, analysts were very worried about the impact of falling oil prices on DHI's revenues. This makes sense as a significant portion of DHI's revenue comes from Texas, which has been hurt badly by the collapse in crude prices the last few months. Surprisingly, management hasn't seen a slowdown from Texas house spending. In fact, management believed the decrease in oil prices was beneficial as the savings from lower gas prices was leading to increased demand for housing. Another potential worry is the potential for squeezed margins as revenue comes increasingly from DHI's express homes segment, which has lower margins as a result of selling to customers on the lower end of the spectrum (affordable housing). While this is a cause for concern as the express markets business now accounts for half of new orders, management noted that margins had been much better than expected and were also expected to improve in the future. Thus, the roll out of Express Homes into markets offers even more potential than previously expected.