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D.R. Horton Going Strong; Gross Margin Headwinds Persist

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We issued an updated research report on D.R. Horton, Inc.DHI on Nov 18, 2015.

On Nov 10, D.R. Horton delivered mixed fourth-quarter fiscal 2015 results - missing the Zacks Consensus Estimate for earnings while beating the same for revenues. Earnings of 60 cents per share surged 33.3% year over year driven by 27.7% jump in homebuilding revenues and increase in pre-tax profits.

In fact, D.R. Horton's homebuilding revenues and order trends have remained strong in fiscal 2015 due to improving housing demand. After a lull in the housing sector in the first quarter, construction activity picked up in the ensuing months, supported by an improving economic environment and better employment scenario. At the fourth-quarter conference call, management commented that demand trends were solid across the country. Moreover, management stated that the solid sales trends continued into October.

The company believes the strong performance will continue in 2016 on the back of robust sales trends, solid community count, strong backlog position and well-stocked inventory of land, lots and homes. The company expects revenues and profits to continue to increase at a double-digit pace in fiscal 2016.

The Texas-based homebuilder offers a diversified line of homes across various price points through a multi-brand platform. Moreover, the company enjoys one of the broadest geographic diversities in the industry and is not dependent on any one market.

D.R. Horton is strengthening its presence in desirable markets through the buyout of homebuilding companies. Some of the notable ones are the homebuilding operations of Breland Homes in Huntsville, AL taken over in Aug 2012; Regent Homes - an entry-level builder in the Carolinas - in Oct 2013; Crown Communities - Atlanta's largest builder - in May 2014, and Seattle-based homebuilder, Pacific Ridge Homes, in Apr 2015. These acquisitions have further diversified the company's operations.

Our main concern regarding D.R. Horton is its gross margins that have been contracting over the past 3-4 quarters due to moderating sales price increases and unfavorable product mix. A higher proportion of lower-priced Express Homes in home closings is unfavorably impacting product mix, thereby bringing down the gross margins. Management does not foresee any significant improvement in gross margins in fiscal 2016 either as gross margins are expected to remain essentially flat in the year.

D.R. Horton carries a Zacks Rank #3 (Hold). Investors interested in the construction sector can consider stocks like The Home Depot, Inc. HD , TRI Pointe Group, Inc. TPH and Lennar Corporation LEN . All the three stocks have a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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