On Jan 15, we maintained a Neutral recommendation on
D.R. Horton Inc.
). Though the company reported dismal fourth-quarter fiscal 2013
results, its fundamentals remain strong.
Why Back to Neutral?
On Nov 12, 2013, D.R. Horton reported dismal fourth-quarter
fiscal 2013 results missing the Zacks Consensus Estimate for both
revenues and earnings as net orders declined. Earnings grew 33.3%
year over year driven by margin expansion and lower interest
expense than the last year. Homebuilding revenues climbed 40%
year over year due to pricing gains.
Net sales orders declined 2% in the fourth quarter as housing
demand slowed. The net order trend was weaker than 12%, 34% and
39% growth reported in the third, second and first quarters,
respectively. The cancellation rate stood at 31%, significantly
higher than 24% in the third quarter and 19% in the second. In
fact, the company's net orders have slowed down in the second
half of 2013 as the recent increase in interest/mortgage rates
and increasing home prices slowed order pace and traffic. We
believe that the sharp increase in interest rates shocked many
customers and a few put off their purchase decisions; thus
increasing cancellation rates and lowering orders.
Encouragingly, order trends improved in Oct 2013. Also, the
company's strong land position keeps it well positioned to meet
demand in fiscal 2014 and 2015.
Moreover, pricing gains and better fixed cost leverage boosted
profits in the quarter. Despite a slowdown in orders in the
second half of fiscal 2013, D.R. Horton's profitability remained
intact due to its cost control and productivity improvement
efforts. Its pre-tax margins have almost doubled from 5.6% in
2012 to 10.5% in fiscal 2013.
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 2013. 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.
Moreover, sustainable increases in housing and housing demand
for the long term will require the overall economy to strengthen.
Until there is more robust economic recovery, the new home sales
could remain below historical levels. Rising input costs, due to
increasing costs of raw material and labor, is also a
Other Stocks to Consider
D.R. Horton carries a Zacks Rank #4 (Sell). Some better-ranked
Standard Pacific Corp.
Toll Brothers, Inc.
). All these companies carry a Zacks Rank #2 (Buy).
D R HORTON INC (DHI): Free Stock Analysis
PULTE GROUP ONC (PHM): Free Stock Analysis
STANDARD PAC (SPF): Free Stock Analysis
TOLL BROTHERS (TOL): Free Stock Analysis
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