Strong Results and Bright Prospects Make D.R. Horton a valuable Buy

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Jan 30, 2015
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D.R. Horton Inc. (DHI, Financial), the biggest U.S. homebuilder declared its earnings called on Monday, 26th January. The quarterly results reflected an overall upbeat performance in the quarter, giving it a good start in 2015. David Auld, DHI’s President and CEO highlighted a solid 16% increase in consolidated pretax income to $220.7 million with a 37% increase in its topline to $2.2 billion.

Dissecting the quarterly report

Talking about sales, DHI’s sales order values increased 40% year-over-year to $2.1 billion, and homes sold increased 35% to 7,370 homes on a 6% in active selling communities. While its average selling price on net sales orders in the first quarter increased 4% to $286,100, the cancellation rate remained relatively stable at 24%, compared to 23% in the year ago quarter. Brand communities like Emerald Homes and Express Homes make up for a substantially major part of DHI’s sales. Express Homes that targets mostly on the entry level buyers accounted for almost 13% of total sales of DHI, 10% of homes closed and 6% of homes sale revenue with the average closing price of $169,000. This affordable housing product by DHI gained a good customer response and is now being offered in 38 markets and 11 states and DHI looks forward to widen the market for Express Homes in majority of its markets. Emerald Homes, the community brand that focuses more on the upper-class strata has a wide presence in 35 markets across 15 states. To give you a glance at the past, the Emerald homes accounted for 17% of Homes sales revenue and 7% of the homes closed were priced more than $500,000.

The positives

DHI’s gross profit margin fell short of expectations in the quarter to come in at 19.8%. The EVP and COO of D.R Horton Michael Murray mentioned that around 80 basis point decline was due to increase in cost over the excess of sales price increase and the product mix changes, while the rest of it was due to marginally high warranty costs and construction defiant claims. As the Morningstar analyst James Krapfel puts it, DHI is expected to have lower gross margins but higher returns in terms of revenue. On the other hand, DHI’s financial services boomed up 87% of its pretax income year-over-year to $14.6 million from $7.8 million giving new buyers a FICO score of 717 and an average loan to volume ratio of 89%.

DHI reported a closing inventory of 21,300 homes of which 1600 were models, 12400 were speculative homes of which 4500 were completed. Its construction in progress and finished homes inventory increased by $178 million during the quarter and it is to be noted that the company is preparing for seasonally higher demand in the spring. Its first quarter investment in lots, land and development totaled $564 million, leaving the company with a total of 185,000 lots. The strength of its inventory numbers puts the company in a very strong position as compared to other homebuilders in the market.

Final words

DHI’s earnings per share rose 8.3% to 39 cents as compared with an analyst estimate of 34 cents. Although the micro economic scenario of the housing market has remained low in the past few years, the current situation currently looks far more stable. The market appears to be gaining momentum allowing many new individuals to enter the market, and with a reasonably strong report from DHI, the prospects of the housing market in the US seem to be improving. The company looks forward to sustaining its gross margin in the range of 19.5% to 20% subject to potential fluctuations from product mix, warranty and interest cost. DHI’s management remains focused on double digit increases on the top and bottom lines and looks forward to a spring that has a lot of growth opportunities not only for DHI but also for the whole of housing market.