Updated from 9:57 a.m. EDTHomebuilders were hammered Friday after D.R. Horton ( DHI) reported a drop in third-quarter new-home orders and slashed its full-year earnings forecast. More sector pain could be in store next week, when earnings reports from homebuilders start to arrive. Many builders are likely to cut their guidance due to continued margin erosion stemming from land option write-offs and aggressive discounting of homes. D.R. Horton, the largest U.S. homebuilder, said that its orders for the quarter ended June 30 fell 4.4% to 14,316 homes from 14,980 a year earlier. The value of the homes sold dropped to $3.8 billion from $4.1 billion. The company expects to post third-quarter earnings of 93 cents a share, well below analysts' average estimate of $1.30, as compiled by Thomson First Call. The company's forecast includes about 11 cents a share in write-offs related to land option contracts. "The current home sales environment is characterized by an increase in both existing and new homes available for sale, higher than normal cancellation rates and an increase in the use of sales incentives in many of our markets," said Chairman Donald R. Horton in a statement. For the full fiscal year, D.R. Horton sees earnings of at least $3.65 a share, compared with its earlier forecast of $5.25 to $5.35. Analysts target full-year earnings of $4.92 a share. "We think the sharp deterioration in earnings throughout the end of fiscal 2006 likely reflects sharply lower closings and significantly lower margins," Bank of America analyst Daniel Oppenheim wrote in a research note. He estimates the company's gross margins will fall to 16.2% in the fourth quarter of this year, down from 25.2% in the fourth quarter of 2005. Oppenheim cut his 2006 EPS target on Horton to $3.65, down from $4.85, and slashed his 2007 target to $1.85, from $2.55, due to faster-than-expected margin declines.
Horton's sentiments echo warnings from across the industry as builders ratchet down their fiscal 2006 estimates. Several major homebuilders, including Toll Brothers ( TOL), KB Home ( KBH) and Pulte ( PHM), have cut their fiscal-year guidance in the past two months. Shares of Horton were down 7.6% to $21.13 in afternoon trading Friday. Other big decliners in the homebuilding sector were Meritage ( MTH), which fell 7.7% to $38.83, and Beazer ( BZH), which dropped 5.5% to $38.58. Next week Ryland ( RYL), NVR ( NVR) and M.D.C. Holdings ( MDC) will report earnings. All three will likely cut their full-year guidance, according to Oppenheim. In other builder news Friday, Raymond James released a report that said contracts for housing sales fell 42% year over year in June in the greater Washington area, according to an area realtors groups. Closings declined 38% and the inventory on the market now represents 7.1 months of supply, compared with 1.6 months in June 2005 and 5.9 months in May. "We continue to believe the Washington, D.C., market is headed lower as excessive speculation and overbuilding will weigh on the market for the foreseeable future," Raymond James analyst Rick Murray wrote. Public homebuilders that have a major presence in the market include NVR, Toll Brothers and Hovnanian ( HOV).