D.R. Horton: Texas-Sized Builder And Raring To Go

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Like its home state of Texas,D.R. Horton ( DHI ) 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 growing demand.

It's been an aggressive land buyer since 2009, back in the land game earlier than most other builders, as was Miami-basedLennar ( LEN ).

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.

Pricing Power

"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 ( KBH ) "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 fell.

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 and earnings."

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 appealing.

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 2006.

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.

Every Nail

"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. "Hovnanian ( HOV ),Beazer ( BZH ) 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.

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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