D.R. Horton's Results Speak to a Firming Housing Market
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D.R. Horton (NYSE: DHI), one of the largest homebuilders in the US, posted excellent fiscal 2012 second-quarter results earlier this week that support our view that the domestic housing market is firming. Though we liked its performance, we still believe the homebuilding group is a bit ahead of itself as it relates to valuation, and we remain on the sidelines. We continue to prefer ancillary, diversified plays on the housing market via banking exchange-traded funds that we hold in the portfolio of our Best Ideas Newsletter.
The statistics conveying D.R. Horton’s growth off “the bottom” were fairly impressive. Homebuilding revenue in its fiscal second quarter jumped 28% thanks to a more than 20% increase in homes that closed during the period. The firm’s diluted earnings per share advanced to $0.13 per share, which compares to a $0.09 per share in the same quarter last year and consensus estimates of $0.03 per share. Homebuilding revenue and homes closed during the second-quarter of 2012 both showed accelerated growth on a sequential basis.
D.R. Horton’s internal metrics were perhaps the most welcome in the period. Net orders for the second quarter jumped nearly 20%, to 5,899 homes, while the value of net sales orders advanced almost 30%. Importantly, the firm’s cancellation rate of 22% (cancelled sales orders divided by gross sales orders) was the best since pre-downturn rates (17% to 21%)! D.R. Horton’s order backlog also swelled 17%, to 6,189 homes, while the value of that backlog jumped 25%.
Looking ahead, D.R. Horton expects stronger closings and profitability in the second half of its fiscal year and that it will achieve the dubious honor of advancing beyond its three-year cumulative loss position, resulting in its ability to significantly reduce the valuation allowance of its deferred tax asset.
As it relates to investors in the homebuiding space, though we liked D.R. Horton's performance, we don’t have any urge to dive into any homebuilder at this time on the basis of valuation (click here for our valuations of homebuilders). Still, we view D.R. Horton’s fiscal second-quarter as a positive data point regarding the domestic economy, and if performance likes this continues, we'd grow more constructive on D.R. Horton and its homebuilding peers.
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