D.R. Horton reports first quarter 2014 earnings per share
D.R. Horton reported net income of $131 million, or 38 cents per share, for the second quarter of 2014. Net income increased 18%, from $111 million (or 32 cents per share) in the first quarter of 2013. Street estimates were just under 34 cents a share, so the number was an impressive beat.
Gross margins and SG&A improve
Gross margins may have peaked, as they decreased 170 basis points on a sequential basis and 40 basis points on a year-over-year basis. This speaks to the pricing power of the company and low input cost inflation, but those days may be numbered. To be fair, pretty much all the builders are experiencing pricing power and muted input costs. Selling, general, and administrative costs decreased to 11.1%. Most builders are reporting extremely high gross margins, including Lennar (LEN), PulteGroup (PHM), Standard Pacific (SPF), and Toll Brothers (TOL).
Size and scale matter
On its conference call, the company described the landscape between the smaller builders and the larger builders. The big builders like PulteGroup (PHM), Standard Pacific (SPF), Lennar (LEN), and Toll Brothers (TOL) are able to access the capital markets and raise funds very cheaply. The smaller builders are finding themselves almost shut out of the capital markets. This gives the bigger builders a tremendous advantage, with the big institutional investors are almost throwing money at them, while the smaller guys can’t take advantage of opportunities due to tight credit conditions.
This climate is obviously a recipe for mergers and acquisitions activity, and we’ve already seen some deals. The smaller builders will find themselves driven into the arms of the bigger builders, and some of the larger builders will find it might make sense to merge. We saw a wave of mergers in the late ’90s in the sector as it recovered from the mini bust of the late ’80s and early ’90s. D.R. Horton has unrestricted cash of over $930 million and will look at acquisitions as a way to grow. The company also has a convertible bond issue, which is deep in the money and which will be converted into stock.