D.R. Horton, Inc. (DHI) reported dismal fourth-quarter fiscal 2013 results missing the Zacks Consensus Estimate for both revenues and earnings as volumes declined.
Adjusted earnings of 40 cents per share in the fourth quarter of fiscal 2013 missed the Zacks Consensus Estimate of 41 cents by a penny due to lower-than-expected top-line performance. Earnings grew 33.3% year over year driven by margin expansion.
Homebuilding revenues of $1.82 billion climbed 40% year over year but missed the Zacks Consensus Estimate of $1.839 billion by 6.3% due to net order decline.
Revenues Were Soft
Home sales increased 40.0% year over year to $1.80 billion due to pricing gains. Land sales contributed $15.8 million to revenues, higher than $10.5 million in the prior-year quarter.
Net sales orders declined 2% in the fourth quarter to 5,160 homes as housing demand slowed. The net order growth was much lower than 12%, 34% and 39% reported in the third, second and first quarters, respectively. The cancellation rate stood at 31%, significantly higher than 24% in the third quarter and 19% in the second. The value of net orders grew 14% to $1.4 billion.
We believe that the recent increase in interest/mortgage rates has slowed order pace and traffic. With the recent improvement in economic conditions and the housing market in general, mortgage rates are edging upwards to more normalized levels since May.
High interest rates dilute the demand for new homes, as mortgage loans become expensive; thus lowering a buyer’s purchasing power. We believe that the sharp increase in interest rates shocked many customers and a few put off their purchase decision; thus increasing cancellation rates and lowering orders.
Orders declined in the West, Midwest and Southwest segments while growing in East, Southeast and South Central regions.
Home closings were up 23.0% to 6,866 homes in the reported quarter compared with 5,575 homes in the year-ago quarter. The upside was driven by growth in all the regions, except the Southwest.
The quarter-end sales order backlog rose 13% to 8,205 homes. Backlog value grew 33% to $2.2 billion. Sales order backlog represents homes under contract but not yet closed at the end of a certain period.
Strong Margins
Gross profit on home sales was $394.8 million, up around 70.0% year over year. Gross margin on home sales expanded 380 basis points (bps) year over year to 21.9%, higher than company expectations of 21% due to pricing gains.
Selling, general and administrative (SG&A) expenses were $186.6 million, up 28.0% from the prior-year quarter. However, SG&A expenses as a percentage of homebuilding revenues improved 90 bps to 10.3%, in line with expectations as the company leveraged its fixed cost structure. Sequentially, the SG&A ratio improved 10 bps.
Consolidated pre-tax income was $202.8 million in the quarter, up 104% year over year. Consolidated pre-tax margins stood at 10.9%, reflecting an improvement of 350 bps year over year. Pre-tax margin, however, declined sequentially perhaps due to soft financial services profits.
Homebuilding pre-tax income was $189.4 million versus $85.7 million in the prior-year quarter. Pre-tax income from financial services came in at $13.4 million, flat year over year.
Annual Results
In fiscal 2013, the company witnessed a 44% increase in revenues to $6.1 billion, missing the Zacks Consensus Estimate of $6.21 billion.
Adjusted earnings were $1.33 per share, which beat the Zacks Consensus Estimate of $1.31 by 1.5%. Earnings grew 70.5% from the prior year.
Other Stocks to Consider
D.R. Horton carries a Zacks Rank #3 (Hold). Better-placed stocks in the homebuilding sector include M/I Homes, Inc. (MHO), KB Home (KBH) and Meritage Homes Corp. (MTH). While M/I Homes carries a Zacks Rank #1 (Strong Buy), KB Home and Meritage Homes carry a Zacks Rank #2 (Buy).
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