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D.R. Horton (DHI) Up 6.6% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
Chevron (CVX) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

A month has gone by since the last earnings report for D.R. Horton (DHI). Shares have added about 6.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is D.R. Horton due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

D.R. Horton's (DHI) Q1 Earnings Lag Estimates, Revenues Beat

D.R. Horton, Inc. kicked off fiscal 2019 on an unimpressive note and delivered a negative earnings surprise of 2.6% in first-quarter fiscal 2019. This leading homebuilder’s earnings also declined on year-over-year basis.

The company’s earnings came in at 76 cents per share in the quarter, missing the Zacks Consensus Estimate by 2 cents. The reported figure also decreased 1.3% from the year-ago adjusted profit level of 77 cents.

Revenue Discussion

Total revenues (Homebuilding, Forestar and Financial Services) came in at $3.52 billion, up 5.6% year over year. The reported figure also topped the consensus mark of $3.47 billion. Indeed, higher prices of both new and existing homes across most of the markets served by the company, coupled with rising interest rates impacted affordability and resulted in some moderation in the demand for homes. Then again, the company has been experiencing steady demand and a limited supply of homes at affordable prices across its markets, given solid economic fundamentals and financing availability.

Home Closings and Orders

Homebuilding revenues of $3.42 billion increased 6.1% from the prior-year quarter. Home sales also increased 7.1% year over year to $3.41 billion, aided by higher home deliveries. Land/lot sales and other revenues were $6.7 million, down from $36.4 million a year ago.

Home closings increased 7% to 11,500 homes and 7.1% to $3.41 billion in value. It recorded growth across all regions (barring Southwest) comprising East, Midwest, Southeast and South Central.

Net sales orders increased 3% to 11,042 homes, with improvement in all operating regions, except Southeast, Southwest and West. Value of net orders remained unchanged year over year at $3.23 billion. The cancellation rate was 24%, up from 22% in the prior-year quarter.

Quarter-end sales order backlog (under contract) increased 10.3% from the prior-year quarter to 13,565 homes. Backlog value increased 7.2% from the year-ago quarter to $4.04 billion.

Revenues at the Financial Services segment increased 5.3% from the year-ago level to $85.3 million. Forestar contributed $38.5 million to its quarterly revenues, reflecting an improvement of 25% year over year.

Margins

The company’s consolidated pre-tax margin contracted 100 bps to 10.7% in the quarter.
Meanwhile, the company acquired homebuilding operations of Westport Homes, Classic Builders and Terramor Homes during the fiscal first quarter for $320.7 million. Through these additions, D.R. Horton took over approximately 700 homes in inventory, 4,500 lots and 4,300 additional lots via option contracts. It also acquired a sales order backlog of approximately 700 homes.

Balance Sheet

D.R. Horton’s cash, cash equivalents and restricted cash totaled $768.3 million as of Dec 31, 2018 compared with $1,506 million on Sep 30, 2018.

Fiscal Second-Quarter Guidance

Consolidated revenues are expected between $3.9 billion and $4.1 billion. Closings are likely to be within 12,800-13,300 homes. The company expects gross margin in the range of 19-19.5%. This will result in a lower consolidated pre-tax profit margin in the quarter.

Fiscal 2019 Guidance

The company expects income tax rate of approximately 25% and homebuilding cash flow from operations of at least $1 billion. Meanwhile, D.R. Horton stated that it remains well positioned to deliver double-digit growth in fiscal 2019. However, this is subject to the strength of the spring selling season.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -9.88% due to these changes.

VGM Scores

At this time, D.R. Horton has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, D.R. Horton has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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