D.R. Horton 3Q Earnings Beat; Revs Miss

Zacks

One of the leading homebuilders D.R. Horton Inc.’s (DHI) net earnings of 42 cents per share in the third quarter of fiscal 2013 comprehensively beat the Zacks Consensus Estimate of 35 cents by 20% and the year-ago adjusted earnings of 22 cents by 90.9%. The earnings upsurge was driven by solid pricing and margin improvement which made up for soft volumes in the quarter.

Homebuilding revenues of $1.64 billion climbed 47% year over year on the back of strong home sales. However, it missed the Zacks Consensus Estimate of $1.75 billion by 6.3%, due to soft net order growth from past two quarters. The net order growth in the first quarter was 39%, while it was 34% in the second quarter 2013.

Quarter in Detail

Home sales increased 46.2% year over year to $1.63 billion driven by net sales order growth and increase in selling prices owing to a broad-based improvement in demand across all markets.

On the other hand, land sales contributed $13.7 million to revenues, much higher than $1.0 million in the prior-year quarter owing to brisk land purchases made by the company.

Net sales orders in the third quarter totaled 6,822 homes, up 12% from the prior-year quarter. However, it was much lower than the last quarter. The value of net orders grew 30% to $1.8 billion driven by increased volumes and average sales prices. The cancellation rate stood at 24%, worse than the prior-year quarter rate of 19%.

Home closings were up 30.0% to 6,464 homes in the reported quarter compared with 4,957 homes in the year-ago quarter. The upside was driven by growth in all the regions.

The average selling price (ASP) of homes closed in the third quarter was $268,000, up 15% year over year, driven mainly by better pricing power as housing demand grows and supply declines.

The quarter-end sales order backlog rose 36% to 9,911 homes. Backlog value grew 46% to $1.6 billion. Sales order backlog represents homes under contract but not yet closed at the end of a certain period. The backlog rose significantly in most regions, except in the Southwest region.

Gross profit on home sales was $349.3 million, up 74.1% year over year. Gross margin expanded 260 basis points (bps) year over year to 20.6%, slightly higher than the long-term normalized rate of 20%. Gross margin was better than management’s expectation of 20% driven largely by higher ASPs and lower incentives due to better market conditions.

Selling, general & administrative (SG&A) expenses were $167.5 million, up 22.8% from the prior-year quarter. However, SG&A expenses as a percentage of homebuilding revenues increased 200 bps to 10.2% as the company leveraged its fixed cost structure. Over the long term, the company aims to drive SG&A to 10% of homebuilding revenues.

Consolidated pre-tax income was $205.1 million in the quarter, up 184% year over year. Consolidated pre-tax margins stood at 12.1%, reflecting an improvement of 580 bps year over year, driven by improvement in both the segments. Improved market conditions, increased investments in land and housing inventories in high demand markets, efficient inventory management and improved SG&A ratio boosted pre-tax income.

Balance Sheet

D.R. Horton’s homebuilding cash, cash equivalents and marketable securities totaled $607.8 million as of Jun 30, 2013 versus $1.1 billion at the end of Mar 31, 2013.

We believe that the steadily improving housing conditions will boost both volume and prices for D.R. Horton homes in 2013 despite recent concerns about rising interest rates. However, they are still below historical levels and housing is still increasingly affordable. In fact, homebuilders have largely benefited from historically-low interest rates, eventually leading to the sharp increase in home buying activity since mid-2012.

In addition to the brisk housing recovery, increased investments in land in high-demand markets, efficient inventory management and improved SG&A expense ratio are expected to boost profits for D.R. Horton in the upcoming quarters.

D. R. Horton currently carries a Zacks Rank #1 (Strong Buy). Other stocks in the homebuilding sector that are performing well and deserve a mention include Ryland Group Inc. (RYL), MDC Holdings Inc (MDC) and PulteGroup Inc. (PHM). While Ryland and MDC Holdings carry a Zacks Rank #1 (Strong Buy), PulteGroup carries a Zacks Rank #2 (Buy).

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