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D.R. Horton earnings impress the Street

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Jan. 29 2015, Published 2:29 p.m. ET

D.R. Horton reports 1Q15 earnings per share

D.R. Horton (DHI) reported net income of $143 million, or 39 cents per share, for the first quarter of 2015. Net income increased 16% from $123.2 million, or 36 cents per share a year ago. Wall Street estimates were just over 34 cents a share, so the number was better than expected.

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Gross margins fall, but SG&A expenses improve

Gross margins may have peaked, as they fell 70 basis points on a sequential basis and 410 basis points on a year-over-year basis. Meanwhile, selling, general, and administrative expenses (or SG&A) decreased to 10.5%.

Most builders are reporting extremely high gross margins, including Lennar Corporation (LEN), PulteGroup (PHM), Standard Pacific Corp. (SPF), and Toll Brothers (TOL).

Size and scale matter

The big builders such as PulteGroup, Standard Pacific, Lennar, and Toll Brothers have an advantage over the smaller builders—they’re 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. Large institutional investors are almost throwing money at these bigger builders, while the smaller guys can’t take advantage of opportunities due to tight credit conditions.

Mergers and acquisitions may take hold

This climate is obviously a recipe for mergers and acquisitions activity. The smaller builders will be driven into the arms of the bigger builders. Also, some of the larger builders may believe merging makes sense.

In fact, we’ve already seen some deals. We saw a wave of mergers in the late 1990s in this sector while it recovered from the mini bust of the late 1980s and early 1990s. D.R. Horton has unrestricted cash of over $518 million and may look to acquisitions as a way to grow. The company also has a convertible bond issue, which is deep in the money and will be converted into stock.

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