On Feb 24, we issued an updated research report on D.R. Horton, Inc. (DHI)
D.R. Horton’s earnings and revenues beat the Zacks Consensus Estimate in the first quarter of 2015 (results announced on Jan 29). Earnings of 39 cents per share increased 8.3% year over year while revenues surged 38% as solid homebuilding revenues made up for weaker gross margins. Homebuilding revenues went up 38% backed by higher closings, improving order trends and pricing gains.
During the call, management noted that demand for new homes and incentive levels were stable across most of its markets during this quarter, including Texas (included in Horton’s South Central region). Management’s commentary was in contrast to other homebuilders like Lennar Corp. (LEN) that hinted at increasing competitive activity and higher incentive levels across the country.
The Texan economy is dependent on the oil complex. Low oil prices can affect consumer confidence and eventually slow down Texas’ economy and thereby home sales. However, encouragingly, management commented that its Texas operations were in line with its expectations in the first quarter as well as in January, despite the slide in oil prices.
Moreover, the company provided an optimistic outlook for 2015 and expects overall housing demand to improve further with the upbeat economy and job growth.
D.R. Horton believes that it is well positioned to meet housing demand in the upcoming spring selling season, backed by solid community count and well stocked inventory of land, lots and homes. D.R. Horton expects revenues and profits to increase at a double-digit rate during 2015.
Overall, D.R. Horton’s strong fundamentals including broad geographic footprint, product diversity, strong land position and steadily improving order trends keeps our faith in the stock.
However, gross margin pressures due to rising land and construction cost amid moderating home price increases concerns us. Cost increases in excess of sales price increases, and unfavorable product mix are hurting gross margins. A higher proportion of lower-priced Express Homes in home closings is unfavorably impacting product mix and thereby bringing down the gross margins.
Stocks to Consider
D.R. Horton carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader building sector include TRI Pointe Homes, Inc. (TPH) and Graña y Montero SAA (GRAM). Both the stocks sport a Zacks Rank #1 (Strong Buy).
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