By Carlos Guillen
Equity markets are struggling to reach for gains after economic data showed that the U.S. produced less than expected in the first quarter and that consumer sentiment has begun to decline.
According to the Bureau of Economic Analysis, real gross domestic product (GDP) during the first quarter of 2013 increased quarter-over-quarter by 2.5 percent (annualized), worse than the Street's consensus estimate calling for a 2.8 percent quarter-over-quarter rise, but still higher that the 0.4 percent achieved in the fourth quarter of 2012. On the positive side, it was very encouraging to see that consumption increased 3.2 percent, making 13 quarters of consistent growth. However, a second sharp drop in government spending served to attenuate overall GDP growth. In fact, consumer spending contributed 2.24 percentage points to total GDP, while government spending took away 0.8 percentage points.
On the inflation side, prices for GDP increased by 1.2 percent (annualized), while economists' average forecast called for a 1.6 percent rise. The slower than expected rise in prices may serve to continue giving the Fed the impetus it needs to maintain its loose monetary policy trajectory.
Perhaps somewhat mixed today was news that consumer sentiment landed better than expected, but declined for the first time this year. The University of Michigan's Consumer Sentiment final April result landed at 76.4, higher than the Street's expectation of 72.4 and higher than the preliminary result of 72.3; however, the index decreased from the 78.6 reached in March. Given the close relation between consumer sentiment and consumer spending, this decline in sentiment at the start of the second quarter may be indicating that consumption will grow at a weaker rate this quarter. As it stands, according to government data posted earlier today, personal consumption expenditures increased quarter-over-quarter by 3.2 percent in the first quarter, the most since the fourth quarter of 2010 when it was 4.1 percent. The strong growth in consumption coincided with the strong ramp in sentiment during the first three months of this year, but may not continue further as evidenced by today's sentiment data point.
Also rather mixed was that consumers' outlook for the economy declined from 70.8 to 67.8 this month, but it was still a higher result than the preliminary figure of 64.2.
In all, despite the rather mixed data points, equity markets are up, but not that much, as reflected by the Dow Jones Industrial Average gaining just about 7 points from yesterday's closing level; however, in relation to last Friday's closing price, the Dow is up over 160 points or almost 1.11 percent, making this week a strong week despite the ups and downs resulting from the massive number of financial reports posted this week.
D.R. Horton's Q1 through the Roof
By David Urani
DHI stock is green today, like a freshly mowed spring lawn, can you smell those profits? It posted fiscal Q2 revenues of $1.39 billion, up 49% from last year and above consensus expectations for $1.28 billion. Likewise, the bottom line beat by $0.13. It was a strong result, and in fact a handful of housing companies had already turned in some positive results prior to this so it's not necessarily a big surprise although D. R. Horton in particular is looking great.
It's no secret the housing market has been rebounding big time over the past year and a half so in a way homebuilders like D.R. Horton have had some shoes to fill. DHI debunked a couple of worries that I had including a recent flat-lining of housing data and rising costs. With respect to the housing data one factor that may be holding back sales has been shortages of inventory. Of course, with D.R. Horton being one of the largest national home builders, it's in a prime position to remedy that issue. In fact, while many private home builders, and even smaller public home builders, have trouble securing the resources to get larger amounts of inventory out into market D.R. Horton has a wide inventory of lots and homes available (175,000 lots owned or controlled and 15,800 completed homes), and a sturdy balance sheet a support it. Consequentially, D.R. Horton is feeding a need for more supply while also capitalizing where others can't which translates into market share gains.
With respect to rising construction costs, which did occur for DHI, they were up 3.8% per square foot. However, average prices were up 10% which led to increased gross margin. Homebuilding gross margin was up to 20.4% from 17.6% year over year, and from 18.8% sequentially. The company also saw higher prices resulting from a mix of larger homes.
Looking ahead, new orders are looking good, up 34% year over year in units and 52% in dollars. Consequentially, backlog of orders is up 54% in units and 76% in dollars. Regionally, there's strength everywhere although the Southeast and West in particular stand out.
Given recent readings for home sales, there wasn't much to indicate that the rate of sales picked up significantly through the winter. However, the spring selling season is well underway as non-adjusted new home sales were up 21% month to month in March according to the Census Bureau. That's actually a pretty typical gain for March (seasonally adjusted sales were up just 1.5%), but nevertheless DHI management noted that the spring selling season is developing well.
In the meantime, the usual influx of demand for the spring may have a more significant impact on the market this year given that there has already been short supply; we question if homebuilders will be able to keep up. Months' supply of new homes available slid to just 3.8 months which means that need for new construction may become even more protracted in the months ahead. Subsequently it's the big builders like D.R. Horton that are best positioned to churn out supply and reap the benefits.