On May 9, 2014, we issued an updated research report on
D.R. Horton Inc.
After a strong first quarter, the leading national homebuilder
reported better-than-expected second quarter of fiscal 2014 results
on Apr 24. The company surpassed the Zacks Consensus Estimate for
both revenues and earnings. Earnings improved 19% year over year,
driven by homebuilding revenue growth of 22% and strong gross
margins. Order trends improved both year over year and
D.R. Horton offers a diversified line of homes across various
price points through its multi-brand platform. Moreover, the
company enjoys one the broadest geographic diversity in the
industry and is not dependent on any one market. Further, the
company's land and lot position is currently the strongest in its
35-year history. In fact, the company is well positioned to meet
demand in fiscal 2014 and 2015.
However, supply shortages and rising costs of building
materials, labor and land raises serious concerns about stability
in the housing market.
A shortage of buildable lots and skilled labor and a lack of
available capital for smaller builders are limiting the production
of homes, thereby lowering inventory of homes, both new and
existing. As a result, neither current nor pent-up demand can be
met. If the supply picture does not improve, home prices could
shoot up further, causing many homebuyers to hold back on their
Moreover, as housing starts accelerate, both labor and
construction material costs continue to experience an upward
pricing pressure. This could prove to be a major deterrent for the
company's margins in the future quarters. Further, interest rates
have started increasing since May 2013, thus slowing down the
housing recovery in the second half of 2013. High interest rates
dilute the demand for new homes, as mortgage loans become expensive
lowering a buyer's purchasing power, in turn affecting volumes,
revenues and profits of homebuilders.
However, despite these concerns, management is confident of
increasing revenues and profitability in the second half of the
year on the back of broad geographic and product diversity, solid
balance sheet and robust land position.
Other Stocks to Consider
D.R. Horton carries a Zacks Rank #3 (Hold). Other building
construction stocks worth considering include
William Lyon Homes
TRI Pointe Homes, Inc.
Toll Brothers, Inc.
). While William Lyon sports a Zacks Rank #1 (Strong Buy), TRI
Pointe and Toll Brothers have a Zacks Rank #2 (Buy).
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