DR Horton results fail to allay housing jitters

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DR Horton shares fell by the most in nearly five months on Thursday after the homebuilder’s first quarter results did little to allay investor concerns over the longer term outlook for the US housing market following a string of downbeat data on the sector this week.

The stock fell as much as 3.7 per cent – the most since November 30 – before recovering to trade 1.4 per cent lower by midday in New York.

The retreat comes despite the Texas-based builder reporting results for the first three months of the year that came in slightly above consensus forecast. Earnings per diluted share was 60 cents on net income of $229.2m — a 17 per cent increase year-over-year — versus forecasts of 59 cents a share on net income of $222.8m.

Home-building revenue rose 17 per cent from the prior-year quarter to $3.2bn, with home closings during the quarter up 15 per cent. Forecasts had been for revenue of $3.1bn from the quarter.

After what chief executive David Auld described in a call with investors as a “strong spring selling season”, the company boosted its consolidated revenue outlook for the full fiscal year to $13.6bn-$14bn, from its previous range of $13.4bn-$13.8bn. DR Horton is also ramping up the number of homes it expects to close this fiscal year to 44,500-46,000, versus previous estimates in the range of 43,500-45,500.

Mr Auld said the results reflected “the strength of our experienced operational teams, diverse product offerings through our family of brands and good market conditions across our broad national footprint.”

He added:

“Our balance sheet strength, liquidity and continued earnings and cash flow generation are increasing our flexibility, and we plan to maintain our disciplined, opportunistic position to improve the long-term value of our company. We also remain focused on growing our revenues and pre-tax profits at a double-digit annual pace, while continuing to generate positive annual operating cash flows and improved returns. With 27,100 homes in inventory at the end of March and a robust supply of lots, we are well-positioned for the remainder of the spring and the second half of fiscal 2017.”

The cool reception on Wall Street, however, underscores a lack of positive surprises in the results, as well as the cold water thrown over housing sentiment earlier this week by data showing that US new-home construction fell 6.8 per cent in March from the previous month, when they climbed 5 per cent. Analysts blamed unusually warm weather a month earlier in February that made the dropback steeper than expected when temperatures returned to a more seasonable level in March.

Also weighing on sentiment, a separate survey this week showed that US homebuilder confidence fell in April from a month earlier, amid higher regulatory costs and ongoing increases in the price of construction materials.

Despite the clouds overhanging the industry as a whole, some analysts were still feeling bullish on DR Horton, one of the largest US homebuilders with a footprint in regions across the country.

“We believe DHI remains the leader in the fast-growing starter and first move-up home categories,” said Ken Leon, equity analyst at CFRA Research. “In our opinion, DHI realising strong order bookings and backlog value, supporting mid-teen revenue growth in 2017.”

Over the past 12 months, DR Horton shares have risen 5 per cent. In January, Moody’s boosted its rating of DR Horton to investment grade — just the second homebuilder at the time to achieve that rating among the 24 that were publicly rated. While analysts praised the company’s tight cost controls, debt leverage, strong operating performance and georgraphic and product diversity, the also cautioned:

“(T)he ratings acknowledge that Horton engages in speculative home construction to a greater extent than most of its peers. While the company has proven to be exceptionally agile in managing these spec exposures, the possibility remains that it could be caught short with heavy unsold inventory if a sudden and very sharp downturn were to occur.”

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