Homebuilder DR Horton Goes from Defense to Offense

August 28, 2012 /

Reports last week of rising new-home sales in July after a June dip gave homebuilders reason to cheer that the housing recovery was back on track.

And with new-home inventory at a near-record low, all the more reason to bring on the shovels. That’s assuming consumers follow them, still a concern in this economy.

Fort Worth, Texas-basedD.R. Horton ( DHI ), which bills itself as “America’s Home Builder,” is ready for action.

The largest builder by number of closings, it operates in 73 markets in 25 states from coast to coast, including its home state of Texas.

During the downturn, the company focused on things it could control, like lowering costs and reducing debt, which it whittled down from $5.5 billion in June 2006 to under $1.95 billion currently.

“Not only did it increase financial flexibility, but it lowered interest expenses, helping the company to return to profitability faster than most of its peers,” said Wells Fargo Securities analyst Adam Rudiger.

On May 1, Horton added more firepower to its arsenal, raising $350 million through the issuance of senior notes at a rate of 4.75% a year, maturing in 2017.

Cash On Hand

The company has $1.168 billion in cash and securities on hand to invest in the business, including buying or optioning land for future development.

“We transitioned from defense to offense,” Chief Executive Donald Tomnitz told analysts in a conference call July 27, after results of the firm’s June-ending quarter, its third fiscal, were released.

He said the firm added lots to its supply and added, “We clearly are going to be buying land and developing lots where it makes economic sense for us.”

Orders in the quarter jumped 25% to 6,079 homes from a year earlier while backlog of homes under contract grew 31% to 7,311 homes.

“We believe these are the initial stages of long-term growth for D.R. Horton,” Tomnitz said in the call.

In mid-August, Horton announced it acquired the homebuilding operations of Breland Homes for an undisclosed sum, giving it more clout on the Mississippi Gulf Coast and in Alabama.

“It was an opportunist purchase to buy some assets in a less competitive market where they already have a presence,” Rudiger said.

While it took a hit during the downturn like everyone else, Horton did better than many of its peers, analysts say.

“They have a strong presence in Texas, which has held up better in the downturn,” Rudiger said as one reason. In 2011, at least 30% of closings came from Texas, he says.

Profits have reaccelerated the last four quarters after slowing in 2010 after the tax credit for first-time buyers ended.

Horton typically focuses heavily on first-time buyers, but has lately been turning more attention to move-up buyers. They are, after all, more active in the market now, able to pay up for larger homes and with more options. Entry-level buyers are still hobbled by strict lending requirements.

At the same time, Tomnitz indicated that Horton would build higher-margin build-to-order homes vs. homes on speculation.

While Horton operates in many markets across the U.S., it said in filings that the most significant percentage increases in closings this fiscal year have occurred in the Southwest and Southeast, especially Arizona and Florida.

Horton’s average closing price in the June-ending quarter rose 5% from the earlier year to $225,000. Barclays Capital analyst Stephen Kim expects the firm’s average price to go to $230,000 or more next year.

“We’re seeing that builders are able to pass through price increases and they are seeing more strength at the higher end of their business,” Kim said.

Witness last week’s strong sales and earnings results from luxury builderToll Bros. ( TOL ) in its July ending quarter.

Higher prices are, in turn, “an important driver to earnings,” Kim added.

Excluding a $1.99 per-share tax benefit, Horton earned 23 cents a share in the quarter, up from 9 cents a year earlier and 3 cents above views of analysts polled by Thomson Reuters.

But as was the case for several other homebuilders, revenue came in lighter than views. Homebuilding revenue rose 14% to $1.1 billion, with homes closed in the quarter rising 9% to 4,957.

Leading Indicator

“Order growth is what is really driving the business,” said Kim, adding that orders are “the leading indicator” of builders’ health and what drives sentiment around the stock.

Horton’s shares have risen more than 48% since the start of the year.

However, Kim says Horton has shown somewhat lower order growth over the last couple of quarters than some of its peers due to its stronger performance through the downturn. So comparables are tougher.

“I still think their growth is going to be very strong,” Kim said. He expects year-over-year orders to rise 30% for at least the next year.

As for profits, analysts surveyed by Thomson Reuters estimate they’ll rise more than 1,100% this fiscal year over last year, to $2.77 a share. But tax benefits it didn’t take previously when the outlook was still weak are figured into that gain.

In fiscal 2013, when much of those tax benefits go away, profit is seen dropping to a still-robust 92 cents a share, compared to a pre-tax-benefit level of 23 cents in 2011. Profit is seen rising 47% in 2014 to $1.35.

In an interview earlier this month, analyst Megan McGrath of MKM said Horton and Miami-basedLennar ( LEN ) have proved themselves to be good operators in a “choppy environment.”


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