Like its home state of Texas,D.R. Horton (
) does things big.
It closed on more homes in 2012 than any other builder, for a
total of 19,954.
It's got plenty of land, and no wonder. In the last quarter
alone, it invested $912 million to keep supply coming on to meet
It's been an aggressive land buyer since 2009, back in the
land game earlier than most other builders, as was
Fort Worth, Texas-based D.R. Horton used to focus on
first-time buyers. But now move-up buyers are the preferred
target because they are back in the market buying.
First-time buyers? Not so much. Still, they made up 47% of
company-handled closings, down from 50% a year earlier.
Horton homes are bigger than they used to be. That's because
move-up buyers are "trying to buy as much home as they possibly
can," CEO Donald Tomnitz pointed out in a conference call after
the December-ending quarter.
Bigger homes come with bigger prices.
"We have better pricing power on our larger units than we do
on our smaller units," Tomnitz said. In some subdivisions, he
added, "we're eliminating plans because they're too small."
Horton's average closing price in the last quarter was
$236,000, up 10% from the prior year, thanks to what the company
called "pricing power and a larger average home size."
In initiating coverage in mid-March with a buy rating, Sterne
Agee analysts said D.R. Horton's pricing power "should produce
multiyear double-digit EPS growth."
Other analysts have also lavished praise on D.R. Horton
recently. This month Citigroup analyst Will Randow named D.R.
Horton a "Most Preferred" stock in anticipation of
higher-than-expected profit growth.
He namedKB Home (
) "Least Preferred" because of its below-average balance sheet
strength and higher-than-average costs vs. peers.
"D.R. Horton got very aggressive in buying land in 2010, 2011
and going into 2012," Randow said in a phone interview this week.
That will allow the company to "outperform in terms of net orders
and revenue relative to its peer set."
"Lennar already got their upside earnings revisions. D.R.
Horton has more to come," he said.
Lennar had industry-leading gross margins of 22% in its latest
reported quarter. But D.R. Horton is aiming to catch up.
Horton's gross profit margin was 18.8% in its first fiscal
quarter ending Dec. 31, up 200 basis points from the year earlier
as selling prices rose in excess of cost increases and incentives
Pretax income jumped 270% from the year prior to $107.9
million. Per-share earnings rose 122% to 20 cents.
Chairman Donald R. Horton, known as "D.R.," said in a
statement at the time that it was "our most profitable first
quarter since 2007."
"Expectations were relatively low," Randow said. "In the last
quarter, they exceeded expectations on net order growth, margins
Net orders in the quarter jumped 39% from the year-ago period
to 5,259 homes. Their value rose 60% to $1.3 billion.
Moreover, the company said it was seeing pricing power in many
of its markets for the first time in six years. Compared to
paltry and poor-quality existing home inventory, new homes look
Inventories are at the lowest level in years as buyers have
returned to catch a deal before prices rise too much and while
mortgage rates are still low.
In January, average single-family home prices in 20 major
markets in the S&P/Case-Shiller index rose 8.1% vs. a year
earlier. Phoenix led with a 23.2% gain. It was the highest
year-over-year increase the index has logged since the summer of
D.R. Horton is active in Phoenix and other markets that have
rebounded strongly, including Florida. Home sales in Southwest
Florida are nearing their peak years, and with half the number of
employees, Tomnitz told analysts.
The company has become leaner and more efficient in the field
and in the corporate office, he said. New technology in the field
"allows people to do more with less."
Other technology has made it easier to control costs in
bidding out jobs to subcontractors.
"Today, we know every nail on every two-by-four that goes into
each and every plan," Tomnitz said in the call.
At year end, D.R. Horton boasted a sales order backlog of
7,317 homes, up 62% from the prior year.
While it's been an aggressive land buyer, it buys only when it
thinks it can get its investment back in two years.
"They're trying to maintain a risk-averse profile," said Wells
Fargo analyst Adam Rudiger. "They don't want to get too long on
land. That's what got everybody in trouble."
Lennar, in contrast, "is willing to put more land on its
balance sheet and take more risk," he said.
Of the $912 million Horton invested in land, lots and
development costs in the first quarter, $340 million was for
finished lots. Most of the purchases were in the South Central
and Southeast regions.
At year end, Horton controlled around 177,000 lots, some in
slow-to-recover markets still mothballed.
Horton's active community count grew 9% vs. the earlier year's
same quarter. The company expects to grow its community count 10%
in the current fiscal year. It recently raised $700 million of
low-interest debt to help fund growth.
"It's not shrinking like some of its peers," Rudiger said.
) andMDC (MDC) were too conservative. They were not willing to
spend on land and sold out sooner than expected last year.
"You need land to grow," he said.