We maintain our Neutral recommendation on DR Horton, Inc. (DHI) following appraisal of the first quarter of fiscal 2012 results.
DR Horton reported earnings of 9 cents per share in the first quarter of fiscal 2012 versus a net loss of 4 cents in the year-ago quarter driven by higher homebuilding revenue and lower costs. Earnings per share outperformed the Zacks Consensus Estimate of 5 cents. Homebuilding revenues climbed 15.5% year over year to $885.6 million, on the back of improved home sales. The first quarter also witnessed profitability with pre-tax income improving by almost $50 million from the year-ago quarter. DR Horton’s management is upbeat about the recent results and believes that it has started the financial year on a strong note despite macroeconomic and housing conditions remaining soft. Further, the company hopes to be profitable for every quarter of fiscal 2012 as well as for full year fiscal 2012 even if volumes remain flat from 2011 levels. We believe 2012 may prove to be the first year of a US housing recovery from the deteriorating home demand witnessed in the recent past.
Moreover, DH Horton has strong cash flows which are being used to pay back its outstanding debts. Diligent debt-payback policies have helped lower interest costs and spur profitability. In addition to lower interest costs, management is also making an effort to reduce other costs. Selling, general & administrative expenses in the first quarter of 2012 were almost flat from 2011 levels driven by cost control. During the housing downturn, homebuilders responded to declining sales and increased cancellation rates with significant concessions. These concessions and discounts are being withdrawn gradually, thus boosting margins.
We however prefer to remain on the sideline as the recovery process of the housing market will likely be slow. The downturn in the housing industry led to lower demand for new homes, an oversupply glut in the market, and sharply falling prices because of concessions. The housing market has also become extremely aggressive and DH Horton’s new homes are facing tough competition from housing alternatives like resale homes and foreclosed homes. Though demand trends for new homes are slowly stabilizing, management expects the overall demand for new homes to remain sluggish for some time, given the high unemployment rates, low consumer confidence, rising interest rates and tightened mortgage lending standards.
To read this article on Zacks.com click here.
Zacks Investment Research
