D.R. Horton: Orders Gain Strength, Gross Margin Risks Linger

On Apr 30, we issued an updated research report on D.R. Horton, Inc. DHI.

D.R. Horton’s earnings and revenues beat the respective Zacks Consensus Estimate in the second quarter of fiscal 2015 (results released on Apr 22). Earnings of 40 cents per share increased 13% year over year, while revenues jumped 38% as solid homebuilding revenues made up for the weaker gross margins. Homebuilding revenues went up 38% backed by higher closings, improving order trends and pricing gains. Net sales orders rose 30% backed by an improving sales pace.

D.R. Horton’s homebuilding revenues and order trends have remained strong over the past few quarters due to improving housing demand.

During the call, management commented that housing market conditions were relatively stable during the quarter with normal demand trends across all markets. They further said that the spring selling was off to a strong start.

The company believes that it is well positioned to meet housing demand in the ongoing spring selling season on the back of solid community count and land position. D.R. Horton expects revenues and profits to increase at a double-digit pace during 2015.

Overall, D.R. Horton’s strong fundamentals including broad geographic footprint, product diversity, strong land position and steadily improving order trends keep our faith in the stock.

However, D.R. Horton’s gross margins have declined over the past few quarters due to an unfavorable product mix and moderating sales price increases. A higher proportion of lower-priced Express Homes in home closings is unfavorably impacting product mix and thereby bringing down the gross margins. Management does not foresee any significant improvement in gross margins in the second half of fiscal 2015 either.

In fact, gross margin pressures due to rising land and construction cost amid moderating home price increases is a broader housing market headwind.

Stocks to Consider

D.R. Horton carries a Zacks Rank #3 (Hold). Better-ranked stocks in building sector include Meritage Homes Corp. MTH, Ryland Group Inc. RYL and Toll Brothers, Inc. TOL. All the three companies sport a Zacks Rank #2 (Buy).

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