1/29/2013
By David Urani

More Articles by David Urani

Homebuilder Confidence Back Up

Market Valuation Entering "Fair" Territory

Can Brunswick Float Your Boat?

D.R. Horton (DHI) posted a homerun fiscal 1Q earnings report this morning with a bottom line result of $0.20, a $0.06 beat versus consensus. That was driven by sales of $1.22 billion (versus the $1.13 billion consensus), up 39% year over year, as home closings were up 26% along with increased prices due to pricing strength, larger average homes, and geographic mix. To be fair, D.R. Horton is one of the strongest homebuilders in our view and others may be challenged to replicate earnings quite this good, but the results are yet another endorsement of the rebounding housing market.

The company's namesake chairman, Donald Horton, went as far as to say "D.R. Horton is the best positioned it has been in its 35 year history. We are looking forward to the spring selling season with optimism."

Not only were sales relatively strong (note: the quarter to quarter declines are seasonal winter slowdown) but gross margin continued to march higher, to 18.8% from 16.8% a year ago and from 18.1% in the prior quarter. And the outlook for sales in the coming quarter remains positive, with new orders having accelerated to +39% year over year versus +24% in the previous quarter. As a result, units in backlog are up 62%, and even more impressively the dollar value of backlog is up 80%.

Following its strong showing for the quarter, DHI stock is up more than 10% mid-day to a five and a half year high.

As we noted for Monday's pending home sales report, nationwide sales are being held back to an extent by a short supply of homes in a number of areas. And that's where D.R. Horton gets an advantage over most of the competition; it's one of the largest homebuilders, with $5.0 billion of home and land inventory. In a way, it's able to turn in stronger sales results because it has had the resources and liquidity to build up supply whereas many smaller builders aren't as well equipped to take advantage of rising demand. Tight credit is one hurdle for some builders. In the meantime, we would also note that D.R. Horton is quite a diversified company geography-wise and it isn't overly exposed to any particular markets in the event of turbulence.

But with respect to any regional turbulence, the Case Shiller home price report this morning showed us that the pricing recovery seems to have remained on track in all regions except for New York (where interestingly Mr. Case himself says decreased banker bonuses are the culprit).

I will say that the Case Shiller index is a very lagging indicator, being from November while also being a three-month average. Nevertheless, it's probably the most accurate and showed a 0.6% month to month increase in national prices (10th increase in a row), while showing overall prices up 5.6% year over year. In the meantime, prices are still a full 30% off of 2006 levels and while I don't necessarily see them bubbling up quite that high again you can see the rebound potential.

David Urani
Wall Street Strategies