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Homebuilder D.R. Horton (DHI) is soaring higher after delivering a top and bottom-line beat for Q3 as a lack of supply of available housing and favorable demographics once again buoyed demand for new home construction. The upside results were accompanied by a new $4.0 bln share repurchase program, which is adding some fuel to the fire today as the stock breaks out to all-time highs. DHI's strength is also carrying over to other homebuilder stocks, most notably including Lennar (LEN), Toll Brothers (TOL), and PulteGroup (PHM).

• Home affordability has been a focal point for DHI and other homebuilders as high mortgage rates and constrained monthly budgets have put home ownership nearly out of reach for many people. To help ease the burden, DHI and its peers have ramped up incentives, including mortgage rate buydowns and reduced home prices.
  • Since DHI mostly caters to the first-time homebuyer, with an average sales price of about $379,000 in Q3 (-1% yr/yr), it's more sensitive than most homebuilders to these affordability issues.
• Due to this increase in incentives, homebuilding margins have fallen under the spotlight across the industry. In Q3, DHI pleasantly surprised investors and analysts as gross profit margin on home sales improved by 80 bps qtr/qtr to 24%, beating expectations, as incentive-related costs were down from a year ago.
• However, during the earnings call, the company stated that incentives are still elevated and that it doesn't anticipate a significant change in the near-term. As such, DHI expects Q4 homebuilding gross margin to be similar to Q3, which we view as a positive considering the environment.
• A slightly more glaring blemish is DHI's downside Q4 revenue guidance of $10.0-$10.4 bln, but since the company's narrowed FY24 revenue outlook remains in line with estimates, the sting of the downside guidance was mitigated.
• Furthermore, the company believes it's in good position to continue taking market share with 42,600 homes in its inventory and as its average construction cycle times have returned to normal levels. Should the Federal Reserve begin cutting interest rates, DHI will be poised to generate stronger margins on those homes in its inventory as they sell.

Overall, it was another strong quarter for DHI and its new $4.0 bln share repurchase authorization is a clear reflection of its confidence regarding the health of the new home construction market and its growth prospects within it.