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D.R. Horton (DHI) Down 5.4% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for D.R. Horton (DHI). Shares have lost about 5.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is D.R. Horton due for a breakout? 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 Q1 Earnings & Revenues Top, Sales View Up

D.R. Horton, Inc. reported better-than-expected results in first-quarter fiscal 2020, thanks to its industry-leading market share, broad geographic footprint and affordable product offerings across multiple brands.

The homebuilder foresees demand to remain strong in the remainder of fiscal 2020. Solid demand, a limited supply of homes at affordable prices across the markets served, favorable economic fundamentals and financing availability, as well as 30,200 homes in inventory (at the end of December) make D.R. Horton well positioned for the spring selling season.

Earnings & Revenue Discussion

Adjusted earnings came in at 99 cents per share in the quarter, surpassing the Zacks Consensus Estimate of 92 cents by 7.6%. The reported figure also increased from the year-ago profit of 76 cents per share.

The quarterly results were adjusted for a tax benefit of $32.9 million related to federal energy efficient homes tax credits that were retroactively reinstated during the quarter.

Total revenues (Homebuilding, Forestar and Financial Services) came in at $4.02 billion, up 14.3% year over year. The reported figure also topped the consensus mark of $3.78 billion.

Home Closings and Orders

Homebuilding revenues of $3.88 billion increased 13.6% from the prior-year quarter. Home sales also increased 13.3% year over year to $3.86 billion, aided by higher home deliveries. Also, land/lot sales and other revenues were $19.7 million, increasing from $6.7 million a year ago.

Home closings increased 13% from the prior-year quarter to 12,959 homes and 13% in value to $3.9 billion. It recorded growth across regions comprising East, Midwest, Southeast, West and South Central, and Southwest.

Net sales orders increased 19% year over year to 13,126 homes, with improvement witnessed in East, Midwest, Southeast, South Central and West and Southwest. Value of net orders also improved 22% year over year to $3.9 billion. The cancellation rate was 20%, lower than 24% in the prior-year quarter.

Revenues from the Financial Services segment increased 20.6% from the year-ago level to $102.9 million. Forestar contributed $247.2 million to its quarterly revenues, reflecting a notable improvement from $38.5 million a year ago.

Margins

Gross margin on home sales revenue in the quarter was 21%, up 100 basis points (bps) year over year and flat sequentially. In the quarter, SG&A expense (as a percentage of homebuilding revenues) was 9.2%, down 30 bps from the prior year quarter. The company’s consolidated pre-tax margin expanded 230 bps to 13% in the quarter.

Balance Sheet

D.R. Horton’s cash, cash equivalents and restricted cash totaled $1.58 billion as of Dec 31, 2019 compared with $1.49 billion in the corresponding period of 2018. It repurchased 3 million shares of common stock for $163.1 million during first-quarter fiscal 2020. The company has $732.6 million remaining under the stock repurchase authorization (as of Dec 31, 2019), which has no expiration date.

Fiscal Q2 Guidance

The company expects revenues between $4.25 billion and $4.4 billion (indicating an increase from $4.1 billion a year ago), homes closing within 13,800-14,300 units (depicting growth from 13,480 units of home closed a year ago), and home sales gross margin to be approximately 21% (compared with 19.3% in the year-ago period). Homebuilding SG&A expenses are expected to be around 9% of homebuilding revenues (flat year over year).

Guidance Revised Upward

The company expects revenues between $18.5 billion and $19.1 billion versus $18.5-$19 billion expected earlier, and homes closing within 60,000-61,500 compared with prior projection of 60,000-61,000. Effective tax rate is expected between 23% and 24% for the second, third and fourth quarters of fiscal 2020. Homebuilding cash flow from operations is projected in excess of $1 billion. It intends to reduce share count by 2% in fiscal 2020.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 5.84% due to these changes.

VGM Scores

At this time, D.R. Horton has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise D.R. Horton has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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