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Why Is D.R. Horton (DHI) Up 6.6% Since Last Earnings Report?

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A month has gone by since the last earnings report for D.R. Horton (DHI - Free Report) . Shares have added about 6.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is D.R. Horton due for a pullback? 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.

D.R. Horton's (DHI - Free Report) Q4 Earnings Miss Estimates, Grow 49% Y/Y

D.R. Horton, Inc. ended fiscal 2018 with impressive fourth quarter of fiscal 2018 results, courtesy of continued strategic focus to consolidate market share, while generating strong cash flow, pre-tax income and returns. Notably, it completed its 17th consecutive year as the largest homebuilder in the United States, with home closing of 51,857 in fiscal 2018.

The company’s earnings came in at $1.22 per share in the quarter, missing the Zacks Consensus Estimate by a penny. Nevertheless, the reported figure surged 49% from the year-ago profit level of 82 cents. It remains focused to consistently grow its top line and pre-tax profits at a double-digit pace annually, while generating higher annual operating cash flow and returns.

Revenue Discussion

Total revenues (Homebuilding, Forestar and Financial Services) came in at $4.51 billion, up 8.3% year over year. However, the reported figure missed the Zacks Consensus Estimate of $4.59 billion. Indeed, higher prices of both new and existing homes across most of the markets served by the company, coupled with rising interest rates impacted affordability and resulted in some moderation in the demand for homes.

Home Closings and Orders

Homebuilding revenues of $4.39 billion increased 8% from the prior-year quarter. Home sales increased 8.5% year over year to $4.38 billion, aided by higher home deliveries. Land/lot sales and other revenues were $12.7 million, down from $31.4 million a year ago.

Home closings increased 11% to 14,674 homes and 9% to $4.4 billion in value. It recorded growth across all regions (barring West) comprising East, Midwest, Southeast, South Central and Southwest.

Net sales orders increased 11% to 11,509 homes on continued improvement. Orders increased across all operating regions, except Southwest and West regions. Value of net orders grew 10% to $3.4 billion. The cancellation rate was 26%, up from 25% in the prior-year quarter.

Quarter-end sales order backlog (under contract) increased 8% to 13,371 homes. Backlog value increased 8% to $4 billion.

Revenues at the Financial Services segment increased 10.4% to $102.2 million. Forestar contributed $32.2 million to its quarterly revenues.

Margins

The company’s consolidated pre-tax margin expanded 180 bps to 13.5% in the quarter. Home sales gross margin improved 130 bps year over year but was down 30 bps sequentially to 21.6% in the quarter. However, SG&A expenses decreased 20 bps from the prior-year quarter to 8.4%, as a percentage of homebuilding revenues.

Fiscal 2018 Highlights

Total revenues (homebuilding, Forestar and financial services) of $16.1 billion increased from the year-ago level of $14.1 billion. Earnings came in at $3.81 per share, up 41% year over year.
Pre-tax income increased 29% to $2.1 billion and pre-tax margin improved 140 bps to 12.8%. The company’s homebuilding return on inventory improved 360 bps from a year ago to 20.2%. Its homebuilding cash flow from operations was $1 billion in fiscal 2018. Home sales gross margin grew 130 bps to 21.3% in the year. SG&A, as a percentage of homebuilding revenues, improved 30 bps to 8.6%.

Balance Sheet

D.R. Horton’s cash, cash equivalents and restricted cash totaled $1,506 million as of Sep 30, 2018 compared with $1,007.8 million on Sep 30, 2017.

Fiscal First Quarter Guidance

Revenues are expected between $3.3 billion and $3.5 billion. Closings are likely to range from 11,000-11,500 homes. Pre-tax margin is expected between 11.4% and 11.7%.

Fiscal 2019 Guidance

The company expects income tax rate of approximately 25% and homebuilding cash flow from operations of at least $1 billion. Meanwhile, D.R. Horton stated that it remains well positioned to deliver double-digit growth in fiscal 2019. However, this is subject to the strength of the spring selling season.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.36% due to these changes.

VGM Scores

At this time, D.R. Horton has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, D.R. Horton has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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