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On May 15, we upgraded our recommendation on D.R. Horton Inc. (DHI - Analyst Report) from Neutral to Outperform following solid results in the second quarter of fiscal 2013.D.R. Horton now carries a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

On Apr 26, D.R. Horton announced solid second-quarter results beating the Zacks Consensus Estimate for both revenues and earnings. D.R. Horton’s adjusted net earnings of 32 cents per share handsomely beat the Zacks Consensus Estimate of 20 cents by 60% and the year-ago earnings of 13 cents by 146.2%. The earnings upsurge was driven by both sales and margin improvement in the Homebuilding and Financial Services segments.

Homebuilding revenues climbed 48.7% year over year driven by better pricing power and volume growth amid improved housing market conditions. Homes sold, closed and in backlog, all increased by more than 30% in the quarter compared to the year-ago quarter. Margins improved both sequentially and year-over-year driven by better pricing power and reduced incentives.

D.R. Horton’s first-quarter results (announced in January) were also quite strong beating the Zacks Consensus Estimate for both revenues and earnings and also growing year-over-year. In fact, D.R. Horton has beaten the Zacks Consensus Estimate for the past four straight quarters with an average earnings surprise of 31.3%. Interestingly, pre-tax income in the first half of 2013 increased three-folds from the 2012 levels.

If market conditions remain stable, management expects the company’s profitability to increase in 2013 and 2014. This is expected to be driven by its solid balance sheet and improved liquidity position allowing it to re-invest in growth opportunities; increased pricing power; and rising homes inventory and improving land position.

The robust quarterly results and a promising outlook for the upcoming quarters led to an upward bias in estimate revisions. In fact, the Zacks Consensus Estimate for 2013 and 2014 increased a respective 16.8% and 15.9% to $1.18 and $1.68 per share over the last 30 days.

Other Stocks to Consider

Other stocks in the homebuilding sector that are performing well and deserve a mention include Ryland Group Inc. (RYL - Snapshot Report) and Meritage Homes Corporation (MTH - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy) and KB Home (KBH - Analyst Report), carrying a Zacks Rank #2 (Buy).

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