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On Mar 7, we maintained a Neutral recommendation on D.R. Horton Inc (DHI - Analyst Report), following appraisal of its first quarter fiscal results.

Why the Neutral Recommendation?

On Jan 29, 2013, this leading national homebuilder announced first quarter 2013 adjusted earnings of 20 cents per share, which beat the Zacks Consensus Estimate by 50.0% and the prior-year quarter earnings by 122%. Homebuilding revenues climbed 39.0% year over year to $1.23 billion, driven by better pricing power and volume growth, reflecting improvement in market conditions from the prior year.

All the operating regions of D.R. Horton reported double-digit sales growth as the company sees a broad improvement in demand across all markets. Reported revenues also beat the Zacks Consensus Estimate of $1.10 billion. The gross margin expanded 200 basis points in the quarter to 18.8% driven by better pricing and reduced incentives.

The Zacks Consensus Estimates witnessed an upward bias following solid first quarter results. The Zacks Consensus Estimate for 2013 rose almost 8% to 95 cents while that for 2014 increased 8.3% to $1.43 in the past 60 days.

D.R. Horton is witnessing significant growth in both volumes and selling prices driven by substantial improvement in demand across all markets. Moreover, new home orders, backlogs and homes have been increasing in double digit percentages. Profitability is expected to continue to improve on the back of D.R. Horton’s geographic diversity, solid cost discipline, sound balance sheet, improved liquidity position, better pricing power, and rising home inventories, and land position.

However, the new home demand remains at historically low levels due to the current weak U.S. economic conditions and tight mortgage lending standards. Sustainable increases in housing and housing demand for the long term will require the overall economy to strengthen, including further job growth. Additionally, the pending federal budget decisions could potentially disrupt the housing recovery. Moreover, the housing recovery was uneven and not broad based with some markets showing more upward momentum than others. A sustainable housing recovery in the long term can be achieved only through a broad-based recovery in the overall economy, which we believe will take time.

Other Stocks to Consider

D.R. Horton carries a Zacks Rank #2 (Buy). Some other housing stocks worth considering include NVR Inc. (NVR - Snapshot Report) – Zacks Rank #1 (Strong Buy), Gafisa S.A. (GFA - Snapshot Report) -Zacks Rank #2 (Buy), and Consorcio ARA, S. A. B. de C. V. - Zacks Rank #2 (Buy).

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