Take Profits in Homebuilder DR Horton and Move on Ahead of Earnings
Should you build a position on DR Horton (DHI) - Get Report , which has had gains in the last three quarters? No.
The industry as a whole, as tracked by the SPDR S&P Homebuilders ETF (XHB) - Get Report , has been recovering from a prolonged decline in housing. The exchange-traded fund is up 5.3% for the year to date and there seems to be a sustained increase in residential home construction.
But it's a tall order to expect DR Horton, one of the largest homebuilders in the U.S., to duplicate what it has done in the first three quarters. Weak September homes data have already had an effect on the stock, which trades around $29. Still, the shares are up 14% on the year, including 27% gains in the past 52 weeks. The company reports third-quarter earnings before the open Tuesday.
That's why now is the time to take profits and move on.
DR Horton focuses on selling higher-priced homes, the type that generates higher margins and brings in more profits. It's true, at just 16 times earnings, the shares aren't expensive. Its price to earnings multiple is still five points below the S&P 500 index. But the Texas company has already been rewarded for its execution after beating expectations in three straight quarters.
For the next quarter analysts, on average, expect the company to report a loss of 62 cents a share on revenue of $3.04 billion, compared to the year-ago quarter when it earned 45 cents a share on revenue of $2.4 billion. For the full year, earnings are projected to be $2.02 a share, up 34% year over year, while revenue of $10.5 billion would mark a year-over-year increase of 35%.
These numbers, if achieved, would be impressive. Investors have come to expect such numbers, as seen by the stock's performance. But the thing to consider is DR Horton will have a tough time matching these comparisons in the quarters ahead, much less beating them. So the stock will struggle to maintain its upward course.
Analysts have also become a bit cautious -- the stock is now less than 5% away from its average 12-month price target of $30.50. That's not enough of a premium to hold these shares, risking a possible disappointment when the earnings are released.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.