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Why is D.R. Horton (DHI) Down 8.1% Since its Last Earnings Report?

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It has been about a month since the last earnings report for D.R. Horton, Inc. (DHI - Free Report) . Shares have lost about 8.1% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is DHI due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

D.R. Horton came up with yet another solid performance in the second quarter of fiscal 2018. Earnings and revenues both surpassed the Zacks Consensus Estimate, courtesy of a solid housing market scenario.

Earnings & Revenue Discussion

The company reported earnings of 91 cents per share, surpassing the Zacks Consensus Estimate of 86 cents by 5.8%. Earnings increased from the year-ago profit level of 60 cents.

Total revenues (Homebuilding, Forestar and Financial Services) were $3.79 billion. The figure beat the Zacks Consensus Estimate of $3.75 billion and increased 16.7% year over year.

Home Closings and Orders

Homebuilding revenues of $3.7 billion increased 16% from the prior-year quarter. Home sales increased 16.3% year over year to $3.67 billion, aided by higher home deliveries. Land/lot sales and other revenues were $13.6 million, up from $6.3 million a year ago.
Home closings increased 15% to 12,281 homes and 16.3% to $3.7 billion in value. The company registered growth across all regions comprising East, Midwest, Southeast, South Central, Southwest and West.

Net sales orders increased 13% to 15,828 homes on continued improvement. Orders increased across all operating regions. The value of net orders grew 13% to $4.7 billion. The cancellation rate was 19% compared with 20% in the prior-year quarter.
Quarter-end sales order backlog (under contract) increased 8.4% to 15,841 homes. Backlog value increased 9% to $4.8 billion.

Revenues at the Financial Services segment increased 9.2% to $94.9 million. Forestar contributed $22.6 million to the quarterly revenues.

Margins

The company’s consolidated pre-tax profit margin expanded 80 bps to 11.7% in the quarter. Home sales gross margin remained flat sequentially but expanded 100 bps year over year to 20.8% in the quarter. SG&A expenses improved 50 bps from the prior-year quarter to 8.8% as a percentage of homebuilding revenues.

Balance Sheet

D.R. Horton’s cash, cash equivalents and restricted cash totaled $1,010.8 million as of Mar 31, 2018 compared with $1,007.8 million as of Sep 30, 2017.

Q3 Guidance

Backlog conversion is expected in the range of 87-89%.

Home sales gross margin is expected in the band of 20.5-21%.

Homebuilding SG&A expenses is projected to be 8.2-8.3% of the homebuilding revenues.

Income tax will likely be between 25% and 26%.

Fiscal 2018 Guidance

The company has increased its consolidated revenue guidance to the range of $15.9-$16.3 billion from the prior expectation of $15.5-$16.3 billion. Homes closing are now expected to fall between 51,500 and 52,500 units (versus 50,500-52,500 units expected earlier). Homebuilding SG&A expenses, as a percentage of homebuilding revenues, are reaffirmed at around 8.7%.

D.R. Horton has updated its home sales gross margin forecast to 20.5-21%.

Consolidated pre-tax profit margin is now expected to be approximately 12.1-12.3% (compared with 11.8-12% expected earlier).

Cash flow from operations is expected to be at least $800 million, excluding Forestar (versus previous expectation of $700).

D.R. Horton expects income tax rate of approximately 25% and share count increase to be less than 1%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been 16 revisions higher for the current quarter compared to two lower.

D.R. Horton, Inc. Price and Consensus

 

D.R. Horton, Inc. Price and Consensus | D.R. Horton, Inc. Quote

VGM Scores

At this time, DHI has an average Growth Score of C, however its Momentum is doing a lot better with an A. The stock was also allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value and momentum investors than growth investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, DHI has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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