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What's in Store for D.R. Horton for the Rest of Fiscal 2016?

We issued an updated research report on D.R. Horton, Inc. DHI on May 9, 2016.

On Apr 21, D.R. Horton reported robust second-quarter fiscal 2016 results with both its earnings and sales beating the Zacks Consensus Estimate. Earnings of 52 cents per share surged 30% year over year on higher home sales, steady margins and increased SG&A leverage. After weak numbers in the previous quarter, home closings increased 12% in the reported quarter, which together with pricing gains, resulted in higher home sales. Net sales orders rose 10% due to improving sales pace.

Management expressed contentment over the “great” start of the spring selling season. However, persistently weak demand trends in Houston – mainly at the higher end due to volatility in the oil and gas sector – has been hurting the region’s economy and slowing down the demand for homes. However, the lower-end demand has remained steady in the region. Regarding labor bottleneck, management seemed quite optimistic and said it did not witness any “real labor constraint widespread” that hurt closings.

The company retained its revenue guidance but raised its profit expectation as it appears well positioned for growth in the second half of this year. D.R. Horton expects to deliver a strong performance in the second half of fiscal 2016 on the back of its robust backlog position and well-stocked inventory of land, lots and homes.

The Texas-based homebuilder offers a diversified line of homes across various price points through a multi-brand platform. Moreover, the company is one of the most geographically diversified in the industry and is not dependent on any one market. D.R. Horton is further strengthening its presence in desirable markets through the buyout of homebuilding companies.

Our main concern regarding D.R. Horton is the gross margin that has been contracting over the past three to four quarters due to moderating sales price increases and unfavorable product mix. A higher proportion of lower-priced Express Homes in home closings is unfavorably impacting product mix, thereby deteriorating gross margins. Management does not foresee any significant improvement in fiscal 2016 either as gross margins are expected to remain essentially flat.

Moreover, the slowing down of demand trends in Houston is a concern.

D.R. Horton carries a Zacks Rank #3 (Hold). Investors interested in the construction sector may consider stocks NVR, Inc. NVR, CalAtlantic Group, Inc. CAA and Masco Corporation MAS.  All the three stocks have a Zacks Rank #2 (Buy).

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MASCO (MAS): Free Stock Analysis Report
D R HORTON INC (DHI): Free Stock Analysis Report
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CALATLANTIC GRP (CAA): Free Stock Analysis Report
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