When you're one of the biggest operators in a relatively fragmented industry, you can do what D.R. Horton (NYSE: DHI) did recently to boost sales in an otherwise slower housing market: acquire competitors. This past quarter, the homebuilder was able to report higher top- and bottom-line results at a time when many of its competitors have reported notable sales declines.
Let's look at D.R. Horton's most recent earnings results and see if it can continue to post better results for the rest of fiscal 2019.
Image source: D.R. Horton.
By the numbers
DATA SOURCE: D.R. HORTON EARNINGS RELEASE. EPS = EARNINGS PER SHARE.
One of the challenging things when looking at D.R. Horton's more recent results is that the company has made several acquisitions over the past year. Since it doesn't break out those acquisitions, it's hard to say whether the company has been able to buck industry trends and grow sales in what has been a weak quarter, or if it's delivering resilient results compared to its peers. Three of its acquisitions all happened in the fiscal first quarter, so these recent acquisitions could be dressing up these results a little.
Data source: D.R. Horton. Chart by author.
The one place where the company's results slipped a little was its margins. According to management, gross margin slipped 150 basis points from the prior year to 19.5%, and the drop was largely attributable to lower selling prices and higher incentives. Also, sales, general, and administrative costs as a percentage of sales ticked up slightly to 8.9%.
These results still put D.R. Horton on the higher end of the homebuilder industry in terms of gross and net income margin, though, so it probably isn't that great of a concern.
What was most encouraging in these results was the company's net new orders, which on a unit and dollar basis were up 6.2% and 4.2%, respectively. The slightly lower dollar increase is largely attributed to lower average selling prices across the board. At the end of the quarter, D.R. Horton had $4.99 billion in backlog.
What management had to say
If you were looking for some deep insight into the recent changes to the housing market on the company's conference call, you didn't get it this time around. CEO David Auld's prepared remarks more or less echoed what he's been saying for several months that, despite challenges in the market, there are underlying economic factors driving demand.
Horton's scale across our broad geographic footprint and our product positioning to offer affordable homes across multiple brands. As we have discussed on our last two calls, affordability concerns have caused some moderation in demand for homes since late 2018, particularly at higher price points. However, this spring, we have continued to see good demand and a limited supply of homes at affordable prices across our markets, while economic fundamentals and financing availability remained solid.
You can read a full transcript of D.R. Horton's earnings release.
Size and scale can count for only so much
D.R. Horton, like many others in this industry today, are acknowledging that one of its best markets right now is in entry-level homes, for which affordability are a greater concern for first-time buyers. Many of the company's new communities are focused on this buyer demographic, and as a result, average selling prices are starting to moderate.
Lower sales prices alone aren't necessarily a bad thing for business, though, as long as the company can maintain gross margin on these less-expensive offerings. D.R. Horton is in a better position than most to sell more affordable homes while maintaining margin, because it has the economies of scale that few of its competitors can match.
For the rest of fiscal 2019, management expects total revenues to land between $16.7 billion and $17 billion, with total homes sold in the 55,000 to 56,000 range. Based on its results for the first six months of this fiscal year, that means it's expecting a modest selling season. With shares trading at a price to earnings ratio of 10.7 -- on the high end of its peers -- D.R. Horton will have to deliver strong margins and keep buying back shares in loads to justify buying shares today.
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