A month has gone by since the last earnings report for D.R. Horton, Inc. (NYSE:DHI) . Shares have added about 2.1% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted 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 Q2 Earnings & Revenues Beat, View Raised
D.R. Horton reported earnings of $0.60 per share, beating the Zacks Consensus Estimate of $0.59 by 1.7%. Earnings also increased 15.4% year over year driven by higher home sales.
Total revenue (homebuilding and financial services) of $3.25 billion beat the Zacks Consensus Estimate of $3.09 billion by 5.2%. Total revenue also rose 17.5% year over year.
Home Closings and Orders
Homebuilding revenues of $3.164 billion rose 17% year over year. Home sales increased 17.6% year over year to $3.158 billion aided by higher home deliveries. Land/lot sales and other revenues were $6.3 million, down from $15 million a year ago.
Home closings increased 15% to 10,685 homes. The company registered growth across all the regions comprising East, Midwest, Southeast, South Central, Southwest and West.
Net sales orders rose 14% to 13,991 homes on continued improvement. Orders increased across all operating regions. The value of net orders grew 17% to $4.2 billion. Cancellation rate of 20% compared with 19% in the year-earlier quarter.
The quarter-end sales order backlog (under contract) rose 7% to 14,618 homes. Backlog value increased 9% to $4.4 billion.
Revenues at the financial services segment increased 29.9% to $86.9 million.
Margins
Gross profit on home sales was $614.5 million, up 15.6% year over year. However, gross margin on home sales contracted 10 basis points (bps) year over year to 19.8%.
Homebuilding selling, general and administrative expenses (SG&A) were $294.5 million, up 14.4% from the prior-year quarter. SG&A expenses, as a percentage of homebuilding revenues, were 9.3%, down 20 bps year over year.
Homebuilding pre-tax income rose 14.4% year over year to $322.4 million, while pre-tax margin declined 20 bps owing to lower SG&A expenses. Higher SG&A dragged the result. Pre-tax income from financial services came in at $31.5 million, up 69.4% year over year.
Consolidated pre-tax income was $353.9 million in the quarter, up 18% year over year. Pre-tax profit margin was in line with the year ago figure at 10.9%.
Balance Sheet
D.R. Horton’s homebuilding cash, cash equivalents and restricted cash totaled $959 million as of Mar 31, 2017, compared with $1,281.3 million as of Sep 30, 2015.
Fiscal 2017 Outlook
The company remains confident about the rest of fiscal 2017 given 27,100 homes in inventory at the end of March and a robust supply of lots. D.R. Horton lifted its fiscal 2017 views on total revenues, homes delivered, SG&A expense, financial services pre-tax profit margin as well as income tax rate.
The company maintains a positive outlook for revenues and profits, both of which are expected to increase double digits, annually.
Total revenue is now projected in the range of $13.6–$14 billion against prior expectation of $13.4–$13.8 billion. Homebuilding SG&A expenses, as a percentage of homebuilding revenues, is likely to be around 8.8% to 9.1% (against 9% expected earlier).
Home closing is expected to be between 44,500 homes and 46,000 homes (against 43,500 and 45,500 homes).
Financial services pre-tax margin is likely to be approximately 35%, up from earlier projection of approximately 30%.
Tax rate is likely to be at around 35.5%, up from 35% expected earlier.
Consolidated pre-tax margin guidance is reaffirmed in the band of 11.2% to 11.5%. Home sales gross margin is maintained at 20%. Cash flow from operations is estimated between $300 million and $500 million.
Q3 Guidance
The company expects 81% to 84% backlog conversion for the quarter.
Housing gross margin is expected at around 20% and SG&A, as a percentage of homebuilding revenues, of 8.6% to 8.8%.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter compared to one lower. While looking back an additional 30 days, we can see even more upward momentum.
VGM Scores
At this time, D.R. Horton's stock has a subpar score of 'D' on both growth and momentum front. However, the stock was allocated a grade of 'B' on the value side, putting it in the second quintile 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.
Our style scores indicate that the stock is more suitable for value investors than momentum investors.
Outlook
While estimates have been moving upward, the magnitude of the revision is net zero. The stock has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
D.R. Horton, Inc. (DHI): Free Stock Analysis Report
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