D.R. Horton Concerns Continue
We expect D.R. Horton, Inc. (DHI - Analyst Report) to report a loss of $0.92 per share in the third quarter, compared to earnings of $0.35 per share in the prior year period. This is due to weaker margins as well as 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 $11.50.
Amid deteriorating home demand, we applaud DHI’s continued four moves to bring supply in line with demand. First, it has decided to reduce future starts. Second, it will make lesser land investments in FY08. Third, amid higher cancellation rates and low home affordability, it makes complete sense for DHI to walk away from the purchase of land under option contracts. Fourth, the company understands that overhead costs remain too high relative to demand.
The management stated that it is continuously focusing on managing selling, general and administrative (SG&A) expenses. We do believe the management will be able to successfully adjust its overhead costs to lower levels. Our expectation is for SG&A to decline to 12% of sales by year-end fiscal 2008.
The company is also focused on driving down its inventory level. Unfortunately, inventory reduction from lower starts is unlikely to bring back double-digit volume growth. A high level of cancellation rates is another cause of concern.