D.R. Horton Beats, But Not All Call a Buy
(D.R. Horton story updated for mid-day movement and homebuilder surge)
FORT WORTH, Texas (
) -- Last week at its annual meeting, D.R. Horton chairman Donald Horton led shareholders in a chant of "We are back!" and after Horton showed a profit in its first fiscal quarter 2010 during Tuesday pre-market session, investors joined the chant and drove D.R. Horton stock up more than 11% in the early afternoon on Tuesday.
What's more, D.R. Horton trading was furious, with more than 17 million shares traded on Tuesday, almost three times its average daily volume of 6 million.
It has all been about returning to profitability and improving on the operating numbers in homebuilding lately, and Horton delivered on both counts in its first fiscal quarter.
Still, investors might want to think cautiously about the pace of homebuilder recovery from here on out. Getting to profitability is a big step in the right direction -- in fact, just surviving the past few years is a huge vote of confidence in D.R. Horton.
Still, while Horton's earnings were a little better than expected, many of the homebuilders that reported in the previous weeks reported improved operating data also, so Horton's outperformance is not a huge surprise, though a surprise nonetheless.
However, analysts say that normalized earnings in the homebuilding sector may still be a ways off, and valuations on stocks like D.R. Horton may not be discounted to the point where any signs of profitability should lead to a rush into the shares.
There is a difference between, "We are back!" and "We are a strong buy!"
All the homebuilders were up on the news, with
M/I Homes
(MHO) - Get Report
which reports on Wednesday, up even more than D.R. Horton with a gain over 15% on Tuesday.
D.R. Horton reported a profit of 56 cents per share. D.R. Horton did take a one-time tax benefit of $149 million in the quarter -- the same benefit that led to profits at
Lennar
(LEN) - Get Report
,
KB Home
(KBH) - Get Report
, and
Meritage Homes
(MTH) - Get Report
.
Lennar was up more than 7% on Tuesday afternoon; KB Home was up close to 7%; and Meritage up more than 3%, though the larger story in homebuilding than the individual gains was that every stock in the sector climbed on Tuesday after the Horton earnings.
A better-than-expected report on existing home sales from the National Association of Homebuilders -- the index increased 1% in December defying forecasts -- may have compounded the bullish outlook on homebuilding stocks on Tuesday.
Notable in D.R. Horton's case, however, is that even without the tax benefit the homebuilder had net income of $42 million in its first fiscal quarter. Some of the other homebuilders had only achieved profits in the most recent quarter only by way of the tax benefit.
Stifel Nicolaus estimates an earnings per share of 9 cents without the tax benefit.
The Street estimate for D.R. Horton's first quarter earnings per share was negative 14 cents. Beating the Street by 23 cents is significant.
Homebuilding revenue for the first quarter of fiscal 2010 increased 23% to $1.1 billion, from $900.3 million in the same quarter of fiscal 2009.
D.R. Horton also improved on the all-important operating numbers in which the real signs of recovery in the housing market lay.
Net sales orders for the first quarter ended Dec. 31, 2009 increased 45% to 4,037 homes, compared to 2,777 homes for the same quarter of fiscal 2009.
Homes closed increased 36% to 5,529, from 4,068 homes closed in the same quarter of fiscal 2009.
D.R. Horton's cancellation rate (canceled sales orders divided by gross sales orders) for the first quarter of fiscal 2010 was 26%. D.R. Horton's sales backlog of homes under contract at Dec. 31, 2009 was 4,136 homes.
The sales backlog for D.R. Horton at the end of the previous quarter was 5,628 homes. While net sales orders for D.R. Horton's first quarter 2010 increased versus the first fiscal quarter 2009, the total level of homes sold was down by comparison the previous quarter level of 5,008.
While D.R. Horton's closings number of 5,529 homes beat Keefe, Bruyette & Woods analyst Bose George's estimate of 4,800, Bose noted that at over 16,000 closing for the fiscal year, D.R. Horton still has a ways to go until it returns to its peak closing level of 61,000 homes achieved in 2006.
"It was a very rough three years, and for Horton to be able to say 'We've made it through, and our balance sheet is strong,' just that they have survived is notable," George said. However, he added that we are now at the point of borderline profitability in the homebuilding sector. "It could be a long road to normalized earnings," George said.
The cancellation rate was similar, at 26% in the previous quarter versus 27% in the first quarter 2010.
Gross margins improved to 17.1% -- Horton has said previously it expects gross margins to be in the 18%-22% for the next several years as the market recovers.
Stifel Nicolaus' Widner has noted that
NVR
(NVR) - Get Report
, the leading indicator in the homebuilding sector, saw its gross margin rate stall at 18.9% in the most recent quarter, and that could be a sign that
homebuilders won't be at the 22% end of D.R. Horton's stated gross margin range for some time yet.
However, Widner said the 17.1% gross margin was better than expected for Horton, even if it is two or three years until it reached the high-end of the 18% to 22% range. He also noted that Horton reduced its impairments to a negligible amount.
It is also not clear that homebuilder stocks are necessarily undervalued, even after the worst housing market in recent history, and after homebuilding sector CEO of Hovnanian Enterprises' Ara Hovnanian appeared on CNBC last week to claim housing stocks were over-corrected. D.R. Horton closed at $11.91 on Monday, while Stifel Nicolaus has D.R. Horton's fair value target at $9.
Donald Horton, chairman of the homebuilder, was more cautious in his earnings release comments than his cheerleading at last week's shareholder meeting, saying, "Market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tightening FHA lending standards and weak consumer confidence. However, new home inventory remains low, interest rates are favorable and housing affordability is near record highs."
At least early on Tuesday, investors were willing to hit the open road to recovery with D.R. Horton. Yet, whether those investors will be rewarded by Horton in the near-term, or see their Horton shares slide in the coming weeks in yet another homebuilder selloff -- while hedge fund shorts book short-term profits -- is still an open question.
Stifel Nicolaus' Widner cautioned investors that the best thing about the D.R. Horton earnings -- which Widner said was the most important of this earnings season -- is that the homebuilder has done all it can at this point, and now the focus turns back to a larger turnaround in the economic fundamentals of the U.S. economy. However, that also means if homes sales and pricing don't improve, homebuilding stocks can sell off quickly based on this big picture data even after solid earnings like D.R. Horton's report.
"D.R. Horton is one of the best business models out there and we like everything about them, except for the price," Widner said.
-- Reported by Eric Rosenbaum in New York.
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