Citi downgrades D.R. Horton’s stock: Time to sell?

On Tuesday, Citigroup downgraded D.R. Horton Inc. (NYSE: DHI) from Buy to Neutral, citing a softening in housing activity expected this summer.

This downgrade came alongside a reduction in DHI’s price target from $181 to $156, reflecting cautious sentiment towards the homebuilding sector amidst economic uncertainties and anticipated rate cuts later in the year.

Citi’s downgrade of D.R. Horton was part of a broader reassessment of the homebuilding sector, including fellow builder Lennar (NYSE: LEN). Both companies saw their estimated EPS for FY24 trimmed, with Citi highlighting limited near-term catalysts until 2025.

Despite the downgrade, DHI’s current stock price of around $135 suggests a potential upside of nearly 15% to Citi’s revised price target.

Fundamental performance and outlook

Founded in 1978 and headquartered in Arlington, Texas, D.R. Horton operates across 119 markets in 33 states, primarily focusing on single-family detached homes ranging from $200,000 to $1 million.

The company not only leads in volume but also provides mortgage financing and title services through its subsidiaries, enhancing its market position and customer engagement.

With a robust financial profile and a strategic market presence, D.R. Horton has demonstrated consistent growth, delivering a 14.7% CAGR in revenue over the past decade, underscoring its market leadership and operational efficiency.

In the most recent quarter, DHI reported a 14% rise in consolidated revenue and a 24% increase in net income year-over-year, reflecting robust operational performance amidst sectoral challenges.

Looking ahead, D.R. Horton is scheduled to announce its Q3 2024 earnings on July 18th, 2024, with analysts expecting a normalized EPS of $3.79 and revenues around $9.64 billion.

This quarter’s performance will provide crucial insights into how DHI navigates current market challenges and capitalizes on its market-leading position amidst ongoing economic headwinds.

D.R. Horton's potential undervaluation

From a valuation perspective, D.R. Horton’s stock is currently trading at a forward P/E ratio of 9.6, reflecting potential undervaluation relative to its historical performance and growth prospects.

Despite short-term pressures, the company’s robust financial health, demonstrated by a healthy balance sheet with $2.75 billion in cash and a manageable debt load of $5.98 billion, positions it well to weather market volatilities and capitalize on future growth opportunities.

In the subsequent section, we will explore what the charts and technical analysis reveal about D.R. Horton’s potential price trajectory amidst evolving market dynamics.

Head and shoulder support broken

D.R. Horton’s stock saw a remarkable surge from the end of 2022 until March this year, more than doubling in price during this period and making an all-time high at $165.75. However, it has fallen nearly 20% from those levels since then.

DHI chart by TradingView

Another important thing to note on the daily charts is the formation of the bearish head-and-shoulder pattern and the stock falling below the neckline support of that pattern yesterday.

Other short-term momentum indicators are also currently in the negative territory suggesting further downside.

Considering that investors who are bullish on the stock must wait for it to cross above its 50-day moving average before initiating any fresh long positions.

Traders, who want to play the short-term earnings move on the upside can purchase the company’s Call options a few days before earnings release.

Bearish traders can initiate short positions at current levels with a trailing stop loss above the 50-day moving average.

If the bearish momentum intensifies, we can see the stock falling back to support near $118, where one can book profits.