DR Horton: Earnings Preview

| About: D. R. (DHI)

DR Horton Inc. (NYSE:DHI) announced that it would release its results for the fourth quarter and full fiscal 2011 that ended on September 30, 2011 before the market opens on November 11, 2011. Fort Worth, Texas-based DR Horton realized earnings per share of 14 cents in the third quarter, higher than the Zacks Consensus Estimate of 6 cents.

In the upcoming quarter, the Zacks Consensus Estimate for DR Horton is pegged at a profit of 15 cents per share, reflecting an annualized growth of 604.76%. There is no upside or downside potential (essentially a proxy for future earnings surprises) for the stock.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 28.33%. The company outdid the Zacks Consensus Estimate in three of the concerned quarters while the remaining one failed to beat the Estimate.

Third Quarter Recap

Homebuilding revenues dropped 29.2% year over year to $975.4 million, driven by depressed home sales. Revenues, however, failed to meet the Zacks Consensus Estimate of $997 million.

Home sales fell 29.3% year over year to $974.5 million, driven by a 33.1% decrease in home closings to 4,555 homes in the reported quarter from 6,805 homes a year ago. On the other hand, land sales contributed $900,000 to revenues compared with $1,000,000 in the prior year.

Net sales orders in the third quarter totaled 4,874 homes, valued at $1.07 billion, compared with 4,921 homes, valued at $1.03 billion in the year-ago quarter. Order cancellation rate plunged to 27% from 28% in the previous year. The quarter-end backlog rose 26.4% to 5,600 homes totaling $1.18 billion, from the prior-year backlog of 4,430 homes totaling $954.4 million.

DR Horton’s homebuilding cash, cash equivalents and marketable securities totaled $1.17 billion at the end of the third quarter of fiscal 2011 compared with $1.63 billion at the end of the fourth quarter of fiscal 2010. Homebuilding notes payable decreased to $1.76 billion as of June 30, 2011 from $2.09 billion as of September 30, 2010.

Estimate Revisions Trend

Earnings estimates for the fourth quarter and for the fiscal 2011 are currently pegged at 15 cents and 27 cents per share, respectively. The ongoing weakness in the homebuilding and construction industry induced the analysts to adopt a cautious stance on the company’s performances in the upcoming quarters.

Agreement of Estimate Revisions

Out of the 14 analysts covering the stock for the fourth quarter, only one has downgraded the stock in the past 30 days. However, none of the analysts has upgraded it in the given period.

Again for the full fiscal, 13 analysts are covering the stock, out of which none has either upgraded or downgraded the stock in the past 30 days.

Magnitude of Estimate Revisions

Following the third quarter earnings release in July, fourth quarter earnings per share was projected at 14 cents.However, in the past 30 days, the estimate rose by a penny to 15 cents and has stayed there since.

On the other hand, for the full year, estimate was 26 cents per share in the past 90 days which fell to 25 cents in the last 60 days. However, in the last 30 days, the estimate increased to 27 cents and has stayed there since.

Our Take

Texas-based DR Horton Inc. is one of the largest national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. Amid deteriorating home demand, DR Horton is attempting to align supply with demand through attractive incentive schemes.

Further, the company has also managed to execute aggressive land purchasing plans during the economic downturn to capitalize on the availability of cheap lots at vital locations, which would have been expensive in a normal market.

However, higher home mortgage foreclosures have increased supply and pulled back prices, thereby making the purchase of a foreclosed home an attractive alternative than buying a new home. This has increased competition and reduced the chances of implementing a price rise for residential properties.

Keeping these in mind, the shares of DR Horton Inc. are maintaining a Zacks #3 Rank, which translates into a short-term Hold rating. Alongside, the shares also have a Neutral recommendation over the long term.

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