On Dec 19, 2014, we issued an updated research report on D.R. Horton Inc. (DHI).
On Nov 11, D.R. Horton reported mixed fourth-quarter fiscal 2014 results. Adjusted earnings of 45 cents per share missed the Zacks Consensus Estimate by 8.2%. However, earnings increased 12.5% year over year as solid homebuilding revenues made up for weaker gross margins. Homebuilding revenues beat the consensus mark and increased 32.8% year over year attributable to higher closings, improving order trends and pricing gains. Gross margin declined both year over year as well as sequentially due to higher incentives and unfavorable product mix.
Despite the soft quarterly results, we commend D.R. Horton’s strong fundamentals. The company offers a diversified line of homes across various price points through its multi-brand platform. Moreover, it enjoys one the broadest geographic diversity in the industry and is not dependent on any one market. Further, the company’s well stocked supply of land, plots and homes provide it with a strong competitive position to meet demand, going ahead.
Moreover, the recent order outperformance increases our confidence in the stock. Management is currently disposing of older inactive inventory to improve inventory turns, cash flow, and the overall return on investment. The company is thus focusing on improving sales pace in many communities across its markets to achieve better return on inventory. In an effort to improve the sales pace, management increased the level of incentives in many communities in the third quarter. Though order trends improved in the past two quarters with this strategy, it lowered gross margins.
D.R. Horton’s gross margins declined over the past two quarters due to higher incentives and unfavorable mix. Though management believes that incentives have returned to normalized levels and have no plans of using high levels of discounting in the future, unfavorable product and geographic mix are expected to continue to hurt gross margins.
The lower-priced Express branded homes, launched in the first quarter, have gained popularity and the company expects to open Express Homes communities in the majority of its markets by the end of fiscal 2015. However, a higher proportion of lower-priced Express Homes in home closings will unfavorably impact product mix and thereby lower gross margins.
Stocks to Consider
D.R. Horton carries a Zacks Rank #3 (Hold). Some stocks in the construction sector worth considering include Headwaters Incorporated (HW), Caesarstone Sdot-Yam Ltd. (CSTE) and United Rentals, Inc. (URI). While Headwaters Incorporated and Caesarstone Sdot-Yam sport a Zacks Rank #1 (Strong Buy), United Rentals has a Zacks Rank #2 (Buy).
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