On Sep 12, we reverted to a Neutral recommendation on
D.R. Horton Inc.
) from Outperform following mixed results for fiscal
Why Back to Neutral?
On Jul 25, 2013, D.R. Horton's fiscal third-quarter adjusted
earnings of 42 cents per share beat the Zacks Consensus Estimate
of 35 cents by 20% and the year-ago earnings of 22 cents by
90.9%. A one-time litigation-related reimbursement largely pulled
up earnings in the quarter. Moreover, solid pricing and margin
gains and lower taxes made up for soft volumes in the quarter to
Homebuilding revenues of $1.64 billion climbed 47% year over
year on the back of strong pricing. However, it missed the Zacks
Consensus Estimate of $1.75 billion by 6.3%, due to soft net
Net orders grew only 12% in the third quarter, much lower than
34% in the second quarter and 39% in the first. A sharp increase
in interest/mortgage rates slowed orders in the latter half of
the quarter. However, pricing gains, lower incentives/discounts
and better fixed cost leverage boosted profits in the
Despite improving profits, we prefer to remain on the
sidelines until we see a rebound in volumes. Moreover, the recent
increases in interest rates is concerning. The mortgage rates
have started increasing from May. High interest rates decrease
the demand for new homes as mortgage loans become expensive, thus
lowering the buyers' purchasing power. This can hurt volumes,
revenues and profits of homebuilders. Any change in federal
lending procedure could also add to the woes. Rising input costs,
due to increasing costs of raw material and labor, is also a
However, if market conditions remain stable, management
expects the company's profitability to increase in 2013 and 2014.
This is expected to be driven by its solid balance sheet and
improved liquidity position allowing it to re-invest in growth
opportunities; increased pricing power; and rising home inventory
and improving land position. The company's geographic diversity
and solid cost discipline are other positive factors that prevent
us from being too pessimistic on the stock.
Other Stocks to Consider
D.R. Horton carries a Zacks Rank #3 (Hold). Some homebuilders
with a favorable Zacks Rank are performing well and are worth
considering. These include,
TRI Pointe Homes, Inc.
Meritage Homes Corporation
) carrying a Zacks Rank #2 (Buy). A specialty retailer of
wood flooring products,
Lumber Liquidators Holdings, Inc
) also carries a Zacks Rank #1 (Strong Buy).
D R HORTON INC (DHI): Free Stock Analysis
LUMBER LIQUIDAT (LL): Free Stock Analysis
MERITAGE HOMES (MTH): Free Stock Analysis
TRI POINTE HOME (TPH): Free Stock Analysis
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