DHI Preparing for a Rebound

While the market continues to remain weak, D.R. Horton (DHI - commentary - Cramer's Take) is focused on generating cash, taking impairments and reducing inventory. As such, the company is getting prepared for an eventual market rebound.

We are now in the phase of the housing market where the worst may be over, but working off inventory will still take some time. I believe that it was Robert Toll of Toll Brothers (TOL - commentary - Cramer's Take) who described that condition as a flat-bottomed boat recovery. When the market turns for the better, we will all recognize the change in character and have ample time to act.

I do think that it is now prudent to look at several of the homebuilders and ascertain who is best prepared for the next housing cycle.

D.R. Horton, the nation's largest homebuilder, reported a first-quarter 2008 loss of $1.3 billion, or $4.14 per share, on total revenue of $1.62 billion, nearly all of which was from home sales.

Net orders in the quarter were for 7,258 homes, with a delivery value of $1.7 billion, compared to 9,983 homes in the year-ago quarter. ASPs dropped 15% year over year, to $220,800. Average closing price declined 8% year over year, to $237,800.

Gross profit margins (excluding impairments) were 9.4%, a whopping 830-basis-point year-over-year decline, 570 basis points of which was due to margin deterioration as a result of increased incentives and price declines. The balance of the decline was due to an increase in amortization of capitalized property taxes.

The company reviewed projects totaling $3.7 billion for impairment. Projects with pre-impairment value of $2 billion were impaired by $1.1 billion, with 80% of these projects in California and the West and Southeast regions. Of the $1.7 billion in projects not impaired, the majority were located in California, Arizona and Florida.

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At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.