By David Urani
On January 27, D.R. Horton (DHI) reported its fiscal first quarter 2012 earnings results. The Company reported revenue of $885.6 million, representing an increase of 15.5% year over year and falling slightly short of the $891.6 million consensus estimate, and below our $905.1 million projection. Home closings were up 13% year over year. The average price per home sold was up 3% year over year to $214,700.
On the bottom line, D.R. Horton reported net income of $27.7 million, or $0.09 per share. The result exceeded the $0.05 per share consensus estimate (which we also modeled for). The result included $1.4 million of asset valuation charges. Excluding charges, gross margin was up to 16.8% from 15.6% year over year and from 16.1% sequentially. SG&A expenses went down as a percentage of revenue to 13.5% from 15.6% year over year, largely as a result of the increase in revenue.
Sales Trends
Economic Trends
New home sales in December were down 2.2% at 307k annually, according to the Census Bureau, and were equal to the October reading. We attribute the decline largely to volatility in the data in the South, which had increased by 14.8% in November and fell back 10.1% in December. At the same time, existing home sales were up 5.0% month to month to the highest level since January at 4.6 million annually. Seasonally adjusted home prices as measured by the Case-Shiller index were down 0.6% month to month in October, and represented the lowest level of the cycle indicating prices are as weak as ever.
Opinion
D.R. Horton's first quarter showed continued strength as the housing market shows signs of a rebound. Total revenue did come up short of expectations but also remained indicative of an improved demand scenario, up 15.5% year over year. Looking forward, new orders trends were also strong, up 13% year over year, while backlog was up 18%.
Gross margin was encouraging, being up both year over year and sequentially. We were glad to see that despite signs that the national pricing situation is weak, gross margin was up 70 basis points quarter to quarter. Management cited cost improvements, reduced incentives and decreased development obligations.
D.R. Horton spent $229 million on land, lots and development in the first quarter, with management noting that good opportunities are popping up. Inventory declined by 300 to 10,200 homes quarter to quarter, but the company is actively building up its pipeline in response to growing demand, and expects its finished supply to increase in the quarters ahead. The company ended the quarter with $1 billion of unrestricted cash and equivalents, and with $1.6 billion of debt with the earliest maturity being in May 2013.
We noted after its previous quarterly results that D.R. Horton seemed to be managing its supply conservatively, as it had fewer homes ready to sell than a year ago. That continued to be the case in its fiscal first quarter, and we suspect that is one reason sales didn't quite meet expectations. That being said, the company has been making an effort to build its supply back up and after a round of land purchases, and is set to increase its exposure to the market as properties are developed. Beyond that, D.R. Horton showed a stronger gross margin and lower overhead costs.
Given its increasing revenue potential (on new property investments) and improving profitability metrics, we continue to feel D.R. Horton is on the right track. Given the strong run-up in the stock in the last four months, we are wary of near-term pullbacks. However, we feel any pullbacks may represent good buying opportunities as the stock continues to trade at reasonable valuation multiples.
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