D.R. Horton Reported a Big Increase in Net Income and EPS
D.R. Horton Pleases Wall Street with a Strong Fourth Quarter
D.R. Horton’s 4Q15 EPS (earnings per share)
D.R. Horton (DHI) reported net income of $238.9 million, or $0.64 per share, for the fourth quarter of 2015. On a YoY (year-over-year) basis, net income rose 43% from $166 million, or $0.45 per share. Wall Street estimates were just over $0.60 per share, so the number was better than expected.
D.R. Horton is based in Texas, and analysts fear that the fall in energy prices will hit the Texas housing market. Evidently D.R. Horton isn’t too concerned, since it raised the dividend, as well.
Gross margins were flat, but SG&A expenses improved
Gross margins were flat on a sequential basis and fell 60 basis points on a YoY basis. Meanwhile, SG&A (selling, general, and administrative) expenses decreased from 10% to 8.9%.
Going forward, the company is guiding that SG&A expenses will be 9.2%–9.4% for 2016.
Size and scale matter
Big builders such as PulteGroup (PHM), Standard Pacific (SPF), Lennar Corporation (LEN), and Toll Brothers (TOL) have an advantage over the smaller builders. They’re able to access the capital markets and raise funds very cheaply. The smaller builders are finding themselves almost shut out of the capital markets, giving bigger builders a tremendous advantage.
Large institutional investors are almost throwing money at these bigger builders, while the smaller guys can’t take advantage of opportunities due to tight credit conditions. Smaller builders typically borrow from their local community banks. Many of them are still hurting from the real estate bust and don’t have much of an appetite for construction loans.
Mergers and acquisitions may take hold
This climate is obviously a recipe for mergers and acquisitions (or M&A). The smaller builders will be driven into the arms of the bigger builders. Between rock-bottom borrowing rates and the inherent advantages of size, we should see more M&A activity. D.R. Horton addressed M&A on the conference call, saying that it continues to look at potential transactions. However, cultural fit is important.
In fact, we’ve already seen some deals. We saw a wave of mergers in the late 1990s in this sector while it recovered from the small bust of the late 1980s and early 1990s. The recent deal between Standard Pacific and Ryland Group, forming CalAtlantic Group (CAA), could be a harbinger of things to come. Investors who want exposure to the homebuilding sector can look at the SPDR S&P Homebuilders ETF (XHB).
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