Pressures Keep a Hold on Horton

D.R. Horton, Inc. (DHI - Analyst Report) reported a second quarter loss of $4.14 per diluted share. This is due to weaker gross margins, higher-than-anticipated overhead costs, and larger-than-expected charges for inventory impairments and write-offs of deposits related to land option contracts. Year-to-date, the company has been successful in generating cash flow, lowering land lots owned and optioned, and cutting the number of homes in inventory.

Also, the company announced that it would cut the quarterly dividend by half to $0.075 per share in an effort to preserve $94.5 million in annual capital. For the remainder of FY08, we expect gross margin pressure to continue from weaker average selling prices and increased incentive use. Our target price is $16.75.

D.R. Horton trades at a book value of 1.2, which is in-line with the industry mean multiple. Typically, homebuilders tend to bottom with book values near 1. Consequently, we believe the shares are pricing in more risk than they have been in the last couple of years. As such, we recommend investors hold shares of DHI through the downturn and earn a dividend yield of 1.97% in the process.

Read the full analyst report on DHI.