D.R. Horton (DHI) Q2 Earnings In Line, Orders Rise

D.R. Horton, Inc. (NYSE:DHI) exhibited a soft performance in the third quarter of fiscal 2016 with sales missing the Zacks Consensus Estimate while earnings only coming in-line. Shares declined 3% in pre-market trading.

However, the Texas-based homebuilder’s order trends remained strong in the quarter

Earnings in Line

The company reported adjusted earnings of 66 cents per share which were in line with the Zacks Consensus Estimate. However, earnings increased 10% year over year driven by improved margins.

Revenues Miss

Total revenue (homebuilding and financial services) of $3.15 billion missed the Zacks Consensus Estimate of $3.29 billion by 4.3%. Total revenues rose 9.5% year over year.

Home Closings and Orders

Homebuilding revenues of $3.1 billion rose 9.0% year over year as the three core brands – D.R. Horton, Emerald Homes and Express Homes – performed well in the quarter.

The U.S. housing market remains strong. Despite a weak start this year amid equity market volatility and global concerns, the construction sector seems to have recovered on the back of strong housing fundamentals. The spring/summer selling season in 2016 was better than the comparable season last year.

Home sales increased 9.1% year over year to $3.12 billion aided by higher home deliveries.

Home closings increased 9% to 10,739 homes. However, while closings rose in East, Southeast and South Central regions, it declined in Midwest Southwest and West regions.

Net sales orders rose 13% to 11,714 homes due to continued improvement in sales pace. Orders increased across all the operating regions. The value of net orders grew 14% to $3.4 billion. Cancellation rate of 21% was higher compared to 19% in the last quarter.

The quarter-end sales order backlog rose 15% to 14,670 homes. Backlog value grew 17% to $4.4 billion. Sales order backlog represents homes that are under contract but not closed at the end of a certain period.

Land sales contributed $30.1 million to revenues higher than $18.5 million a year ago.

Revenues from the financial services segment increased 11.7% to $83.1 million.

Margins Improve

Gross profit on home sales was $632.2 million, up 11% year over year. Gross margin on home sales rose 40 basis points (bps) year over year to 20.3%, which was slightly higher than expectations in the range of high 19–20%.

Cost control, lower incentives and higher prices offset higher costs to result in the positive gross margin growth.

Homebuilding selling, general and administrative expenses (SG&A) were $280.4 million, up 8.8% from the prior-year quarter.

SG&A expenses, as a percentage of homebuilding revenues, improved 10 bps year over year to 8.9% on better cost leverage. SG&A ratio was in line with management’s expected range of 8.9% to 9.1%.

Homebuilding pre-tax income rose 15.6% year over year to $349.2 million. Higher homebuilding revenues and lower SG&A ratio drove the upside. Pre-tax income from financial services came in at $29.4 million, down 7.3% year over year.

Consolidated pre-tax income was $378.6 million in the quarter, up 13% year over year. Pre-tax profit margin improved 40 bps to 11.7%.

Fiscal 2016 Outlook

D.R. Horton continues maintain a positive outlook with expectations of revenues and profits to increase in double digits, annually. The company expects to deliver a strong performance in the fourth quarter on the back of its robust backlog position and well-stocked inventory of land, lots and homes.

D.R. Horton carries a Zacks Rank #3 (Hold). Some better-ranked homebuilder stocks worth considering are KB Home (NYSE:KBH) , Meritage Homes Corp. (NYSE:MTH) and CalAtlantic Group, Inc (NYSE:CAA) . While CalAtlantic Group sports a Zacks Rank #1 (Strong Buy), KB Home and Meritage Homes carry a Zacks Rank #2 (Buy).