DR Horton Tops, Brighter 2H Ahead - Analyst Blog

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Leading homebuilder DR Horton Inc. (DHI) reported adjusted net earnings (excluding inventory impairments and land option write-off costs) of 12 cents per share in the second quarter of fiscal 2012 versus 3 cents per share in the year-ago quarter. Earnings per share largely outperformed the Zacks Consensus Estimate of 4 cents. The earnings upsurge was driven by strong operating results in both the homebuilding and financial services segments.

Homebuilding revenues climbed 28.0% year over year to $935.6 million, driven by double-digit growth in net sales orders, homes closed and sales order backlog. Reported revenues also beat the Zacks Consensus Estimate of $840 million by a wide margin.

Quarter in Detail

Home sales increased 27.0% year over year to $930.6 million, driven by strong growth in net sales orders. On the other hand, land sales contributed $5.0 million to revenues compared with a measly $0.1 million in the prior year.

Net sales orders in the second quarter totaled 5,899 homes (valued at $1.3 billion), up 19% in terms of numbers over the prior-year quarter. Net sales orders also jumped approximately 55% sequentially. Home closings were up 21.0% to 4,240 homes in the reported quarter compared with 3,516 homes a year ago.

The quarter-end sales order backlog rose 17% to 6,189 homes, amounting to $1.4 billion, from 5,281 homes valued at $1.1 billion at the end of the second quarter of 2011. Sales order backlog represents homes under contract but not yet closed at the end of a certain period.

Gross profit on home sales was $163.4 million versus $119.1 million in the prior-year quarter. Selling, general & administrative (SG&A) expenses were 13.6% of homebuilding revenue versus 16.8% in the prior-year quarter as the company leveraged its fixed costs. Operating income from financial services came in at $7.7 million versus $1.6 million in the prior-year quarter. Consolidated pretax income was thus $42.3 million in the quarter compared with a pre-tax loss of $30.8 million in the prior-year quarter.

DR Horton's homebuilding cash, cash equivalents and marketable securities totaled $961.3 million as of March 31, 2012, versus 1.06 billion at the end of December 30, 2011.

Dividend Announcement

The company announced that it will pay a quarterly cash dividend of $0.0375 per share on May 22, 2012 to shareholders of record on May 8, 2012.

Outlook

The company retained its first-quarter momentum in the second quarter, too, with yet another earnings beat. DR Horton had started the financial year on a strong note despite macroeconomic uncertainties and housing conditions remaining soft. The company expects to be profitable in the next half of the fiscal year as well.

Management expects stronger home closings in the third and fourth quarters of fiscal 2012 as demand for new homes historically ramp in the latter half of the year. Gross margin is expected be in the mid-16%-mid17% range in 2012. SG&A is expected to increase in the third and fourth quarters of 2012. However, SG&A as a percentage of revenue will gradually improve in these quarters due to strong home closings and better fixed cost leverage.

Our Recommendation

We currently have a Neutral recommendation on DR Horton. The stock carries a Zacks #3 Rank in the near term (Hold rating).

The last few years have seen a very fragile housing market. The downturn in the housing industry - aggravated by an overall weak economy, high unemployment rates, low consumer confidence, rising interest rates and tightened mortgage lending standards- has been weighing down on homebuilders like DR Horton and its compatriots KB Home (KBH), Pulte Group (PHM) and Lennar Corporation (LEN). Declining demand for new homes and an excess of supply in the market in 2011 drove DR Horton to make large concessions in prices.

Come 2012, there has been a definite improvement in demand in the homebuilding sector. The company's strong performance in the first half is a testament to the fact. Moreover, DR Horton enjoys strong cash flows which are helpful in paying back outstanding debts. All said, we would still prefer to remain on the sidelines until we witness a speedy recovery in the overall housing market.


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