D.R. Horton Earnings: Surprisingly Strong Orders Show Spring Selling Season Off to a Good Start

Shares of D.R. Horton DHI traded higher on April 20 after the no-moat-rated homebuilder reported surprisingly strong fiscal second-quarter results. The firm delivered 19,664 homes during the quarter, 19% above the midpoint of management’s guidance, and total sales of $8 billion exceeded guidance by a whopping $1.5 billion. We think shorter construction cycle times (that is, the amount of time it takes to complete a home) and reduced unsold completed home inventory were primary factors behind D.R. Horton’s home delivery outperformance. Management said cycle times decreased by 12 days during the quarter, which we think is a function of improving building materials supply chains and better labor availability (due to slowing market conditions).

Considering relatively tepid housing data points over the last few months, we were surprised that D.R. Horton’s new orders only declined 5% year over year. The homebuilder even saw order growth in its north, east, and northwest regions. That said, the average selling price of new orders declined 7% year over year as the homebuilder has used a combination of sales incentives, price reductions, and smaller floorplans to improve affordability and stoke demand. Last quarter, D.R. Horton’s order ASP declined 4% year over year, so the firm may have been a bit more aggressive to drive sales during the all-important spring selling season. Nevertheless, management said that pricing, sales incentives, and construction costs are stabilizing.

Most homebuilders are using similar tactics to reignite demand, but we think D.R. Horton’s more affordable price point (as compared with most other public homebuilders) and its significant exposure to the southeast and south central United States (over 60% of inventory) will keep the firm’s order pace ahead of many other public homebuilders.

We’ve raised our fair value estimate 5% to $111 per share due to our more optimistic near-term financial outlook and the time value of money since our last update.