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D.R. Horton's Second Quarter Earnings Look Strong

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D.R. Horton's Second Quarter Earnings Look Strong PART 1 OF 4

Analyzing D.R. Horton’s 2Q16 Revenue: It’s a Strong Start!

Second quarter revenue exceeded expectations

D.R. Horton (DHI) reported 2Q16 revenue of $2.7 billion—a 16% increase on a YoY (year-over-year) basis and a sequential increase of ~14%. The revenue beat Wall Street analysts’ expectations.

Analyzing D.R. Horton&#8217;s 2Q16 Revenue: It&#8217;s a Strong Start!

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Orders rose in both dollars and units

The net sales orders for the second quarter of D.R. Horton’s 2016 fiscal year rose 10% on a unit basis to 12,292 homes and 13% in dollar terms to $2.6 billion. The cancellation rate was 19%. It fell from 23% last quarter.

The backlog increased 12% to 13,695 units and 14% in dollar terms to $4.1 billion. This bodes well for 2016. The backlog is an indicator of future revenue. It’s an important statistic that investors should track.

Management comments on the quarter and fiscal year

Donald R. Horton is the chairman of the board. He said that “The spring selling season is off to a great start at D.R. Horton. Our team delivered a strong second quarter, highlighted by $300.5 million of pre-tax income on $2.8 billion of revenues. Our pre-tax profit margin improved 130 basis points from the prior year quarter to 10.9%. The number and dollar value of our homes sold, closed and in backlog all increased by double-digit percentages. Our net sales orders in the March quarter increased 52% sequentially from the December quarter and 10% from the March quarter last year.”

Implications for the homebuilding sector

The revenue matched Wall Street analysts’ estimates. The EPS (earnings per share) beat Wall Street analysts’ forecasts. The stock fell on the day. Investors who want to trade the homebuilding sector through an ETF should look at the S&P SPDR Homebuilders ETF (XHB).

The spring selling season is about one month away. We’re starting to see household formation increase among Millennials. Increasing activity in the entry-level cohort is beneficial not only for D.R. Horton but also for builders like PulteGroup (PHM) and Lennar (LEN). D.R. Horton introduced a new brand, Express Homes, to target the first-time homebuyer. Recently, Toll Brothers (TOL) announced strong order growth. This means that luxury buyers are still strong.

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