Should You be Concerned about D.R. Horton's New Strategy? - Analyst Blog

On Aug 18, 2014, we issued an updated research report on D.R. Horton Inc. ( DHI ).

On Jul 24, D.R Horton reported mixed third-quarter fiscal 2014 results, missing the Zacks Consensus Estimate for earnings but beating the same for revenues. Adjusted earnings of 32 cents per share declined 23.8% year over year due to higher incentives, reduced gross margins, higher SG&A ratio and massive inventory/land impairment charges in the Mid-west region hurt earnings in the quarter. Homebuilding climbed 27.3% year over year due to higher closings and pricing gains.

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 strong which will enable it to meet demand in fiscal 2014 and 2015.

At the second-quarter conference call, management discussed its new strategy to focus on improving sales pace across its markets to achieve a 20% return on inventory. In an effort to improve the sales pace, management increased the level of incentives in many communities. Though order trends improved in the quarter through this strategy, it took a toll on gross margins - a concern in our view. However, management seems confident of this new strategy.

Moreover, supply shortages and rising costs of building materials, labor and land raises serious concerns about stability in the housing market.

Other Stocks to Consider

D.R. Horton carries a Zacks Rank #3 (Hold). Other stocks in the building sector worth considering include PGT, Inc. ( PGTI ), Team, Inc. ( TISI ) and Winnebago Industries, Inc. ( WGO ). All the three companies 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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