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On May 9, 2014, we issued an updated research report on D.R. Horton Inc. (DHI - Free Report) .

After a strong first quarter, the leading national homebuilder reported better-than-expected second quarter of fiscal 2014 results on Apr 24. The company surpassed the Zacks Consensus Estimate for both revenues and earnings. Earnings improved 19% year over year, driven by homebuilding revenue growth of 22% and strong gross margins. Order trends improved both year over year and sequentially.

D.R. Horton offers a diversified line of homes across various price points through its multi-brand platform. Moreover, the company enjoys one the broadest geographic diversity in the industry and is not dependent on any one market. Further, the company’s land and lot position is currently the strongest in its 35-year history. In fact, the company is well positioned to meet demand in fiscal 2014 and 2015.

However, supply shortages and rising costs of building materials, labor and land raises serious concerns about stability in the housing market.

A shortage of buildable lots and skilled labor and a lack of available capital for smaller builders are limiting the production of homes, thereby lowering inventory of homes, both new and existing. As a result, neither current nor pent-up demand can be met. If the supply picture does not improve, home prices could shoot up further, causing many homebuyers to hold back on their purchase decisions.

Moreover, as housing starts accelerate, both labor and construction material costs continue to experience an upward pricing pressure. This could prove to be a major deterrent for the company’s margins in the future quarters. Further, interest rates have started increasing since May 2013, thus slowing down the housing recovery in the second half of 2013. High interest rates dilute the demand for new homes, as mortgage loans become expensive lowering a buyer’s purchasing power, in turn affecting volumes, revenues and profits of homebuilders.

However, despite these concerns, management is confident of increasing revenues and profitability in the second half of the year on the back of broad geographic and product diversity, solid balance sheet and robust land position.

Other Stocks to Consider

D.R. Horton carries a Zacks Rank #3 (Hold). Other building construction stocks worth considering include William Lyon Homes (WLH - Free Report) , TRI Pointe Homes, Inc. (TPH - Free Report) and Toll Brothers, Inc. (TOL - Free Report) . While William Lyon sports a Zacks Rank #1 (Strong Buy), TRI Pointe and Toll Brothers have a Zacks Rank #2 (Buy).

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