Analyst Note| Brian Bernard, CFA, CPA |
D.R. Horton reported excellent fiscal first-quarter results as the no-moat-rated homebuilder continues to benefit from a very strong U.S. housing market. Home sales grew 48% year over year to $5.7 billion and new contracts increased 56% to 20,418. The combination of strong demand and a very limited supply of existing homes for sale has allowed D.R. Horton to maximize pricing. The average selling price of delivered homes during the quarter increased about 2% year over year, and the new contract ASP increased over 4%. Given a strong pricing environment and neutral input cost inflation during the quarter, the homebuilder reported a very strong 24.1% home sales gross profit margin. Management expects to see greater cost inflation over the coming quarters but is optimistic that pricing gains will more than offset these cost headwinds. We were pleased to see such excellent profit margins; however, we don't think that this level of profitability is sustainable over the long run. D.R. Horton's gross margins (including interest expense) have ranged between 20% and 21% over the last eight years, and we think that range is still a good midcycle assumption for the firm.