D.R. Horton Returns to Profitability

Feb. 2.10 | About: D. R. (DHI)

D.R. Horton (NYSE:DHI) reported net income of $192.0 million or 56 cents per share for the first quarter of its fiscal 2010, compared to a net loss of $62.6 million or 20 cents per share in the first quarter of fiscal 2009.

The current year quarter includes a tax benefit of $149.2 million. Excluding this, fiscal 2010 first quarter earnings are $42.8 million or approximately 12 cents per share. The Zacks Consensus Estimate was a net loss of 16 cents per share.

D.R. Horton reported first quarter home sales revenue of approximately $1.1 billion on 5,529 homes closed, compared to $900.3 million on 4,068 homes closed in the same quarter of fiscal 2009.

First quarter net sales orders (which reflect homes to be closed in the future) were 4,037 homes ($850.1 million), an improvement from 2,777 homes ($567.5 million) in the prior-year period. The company attributed this improvement to its focus on providing affordable homes. It took advantage of the demand created by the federal tax credit for first-time homebuyers.

The cancellation rate declined to 26% in the first quarter of fiscal 2010 from 38% last year. The company reported first quarter sales backlog was 4,136 homes ($884.0 million), compared to 4,006 homes (approximately $889.1 billion).

The home sales gross margin (before inventory improvements and land option write-offs) improved 160 basis points to 17.1%, primarily as a result of average cost of homes declining by more than the average selling prices. D.R. Horton enjoys economies of scale, whereby it can pressure suppliers and subcontractors for lower prices so that selling prices can be reduced without sacrificing margins.

D.R. Horton generated $220 million in net cash flow from operating activities during the first quarter. The net homebuilding debt to total capitalization ratio stood at 28.0% as of December 31, 2009, which was an improvement compared to 36.3% at the end of fiscal 2009.

Though the company is managing well by focusing on affordable homes, negotiating lower construction costs, and reducing SG&A, the market conditions remain challenging due to high inventory levels of available homes, increasing unemployment and weak consumer confidence.

We maintain a Neutral recommendation on the stock.