Despite all metrics for the housing market pointing in favor of homebuilders, there is one thing that might have investors slightly nervous about the coming year: rising costs. While some companies have already reported margin declines from higher material and labor costs, that wasn't a problem for D.R. Horton (NYSE:DHI) as the company's pre-tax margins continued to improve in the first quarter of 2018. Let's take a look at its most recent earnings report to see what it's doing to stave off cost creep.

A street view of a home.

Image source: D.R. Horton. 

By the numbers

Metric Q1 2018 Q4 2017 Q1 2017
Revenue $3.33 billion $4.07 billion $2.90 billion
Gross profit $752.6 million $802.5 million $636.3 million
Net income $189.3 million $313.2 million $206.9 million
Diluted EPS $0.49 $0.82 $0.55


Of course, D.R. Horton's net income was unavoidably hit by the changes in U.S. tax law. The company took a $108 million charge to reduce its deferred tax assets. Without that charge, earnings per share would have been $0.77. 

The first quarter was much better than expected thanks largely to much higher home closings compared to the year-ago result and slightly higher average selling prices. D.R. Horton's total homes closed increased by 15% to 10,788 for the quarter with every region posting a year-over-year improvement.

DHI homes closed by region for Q1 2017, Q4 2017, and Q1 2018. Shows year-over-year improvements in every region.

Data source: D.R. Horton earnings release. Chart by author.

The one element that doesn't look good on paper is that the company's selling, general, and administrative costs as a percentage of revenue increased to 9.5% compared to the prior quarter. That isn't too much of a concern, though, because fourth-quarter SG&A costs were spread across a larger sales base. Compared to the prior year, SG&A as a percentage of revenue remained the same.

D.R. Horton also updated its 2018 guidance to reflect the changes in the tax code. While it still anticipates consolidated revenues, homes closed, and SG&A costs to remain the same, it now expects pre-income tax margins to increase to 11.8%-12%, a 26% income tax rate excluding this quarter's one-time charge, and for cash flow from operations to increase $200 million to $700 million from lower cash tax payments. 

What management had to say

In D.R. Horton's press release, chairman Donald R. Horton's statement demonstrated his optimism about the company's position in the housing industry right now.

Our consolidated pre-tax income in the first quarter increased 23% to $391.2 million on a 15% increase in revenues to $3.3 billion. Our pre-tax profit margin improved 70 basis points to 11.7%, and the value of our net sales orders increased 17%. These results reflect the strength of our experienced operational teams, diverse product offerings from our family of brands and solid market conditions across our broad national footprint.

Our balance sheet strength, liquidity and continued earnings growth are increasing our strategic and financial flexibility, and we plan to maintain our disciplined, opportunistic position to enhance the long-term value of our company. We continue to expect to grow our revenues and pre-tax profits at a double-digit annual pace, while generating positive annualoperating cash flows and increasing returns. With 27,800 homes in inventory at the end of December and 259,000 lots owned and controlled, we are well-positioned for the spring selling season and beyond.

DHI Chart

DHI data by YCharts.

What a Fool believes

Over the past couple of years, almost anyone could make a decent amount of money in the homebuilder business as demand for new homes has been at its strongest in nearly a decade and inventories of homes are rather low. If materials and labor costs rise, which is to be expected with low unemployment and overall economic growth, then we will start to see some of the wheat separate from the chaff in this industry. Some of D.R. Horton's competitors are already starting to show some cracks, but so far, the largest homebuilder in America appears to be doing just fine.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.