The nation's largest homebuilder D.R. Horton (DHI 36.90, -1.40, -3.66%)
reported tepid first quarter results this morning.
First quarter closings came in at the high end of its forecast, but gross margins fell 80 bps to 20%, below estimates, citing higher costs, incentives, and less pricing power. Order growth slowed to 3% from 11% in Q4 but outpaced peers.
Management said the housing market remains choppy, but trends improved in November, December, and into January ahead of the Spring Selling Season, which is right around the corner. October was down yr/yr, but November and December posted growth and January is seeing week-to-week improvement, in-line with seasonality.
Still, for the second quarter, revenue ($3.9-4.1 bln vs. $4.13 bln) and gross margin (19.0-19.5% vs. 20.6%) guidance were below Wall Street's estimates as closings are expected to grow 4-8%.
Despite the recent improvement in traffic and demand trends, the company still did not offer revenue or margin guidance for fiscal 2019 ahead of the all-important Spring Selling Season.
D.R. Horton said it will favor pace over price, still targeting double digit delivery growth for the year, while sacrificing gross margin to a degree to defend its pre-tax margin. The second largest homebuilder Lennar (LEN) said the same thing with respect to pace over price two weeks ago.
DHI is the latest homebuilder to report muted results but convey optimism heading into 2019. Management said the company remains well positioned to take market share and expects good demand, while limited supply and the solid economic environment bode well for the housing market. They believe the recent slowdown is temporary.
So, we basically got more of the same news on the new home market from DHI this morning, hence the muted response in the stock.
D.R. Horton remains well positioned with its superior scale and a 50% entry level mix as the high end of the market continues to underperform.
Homebulding stocks remain in flux until we gain some clarity on the Spring selling season in the coming weeks and months.
In the meantime, the cyclical sector appears reasonably, to somewhat-attractively valued at ~8x EPS and ~1.3x book value. DHI's strong position and scale put the stock at a modest premium to the group at 9x EPS and ~1.6x book value.
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