D.R. Horton (DHI 5.89%) has had a good run of meeting or exceeding Wall Street's expectations in its earnings reports, and that streak stayed alive this past quarter as its $0.93-per-share earnings blew past estimates for the quarter. Not only is the company benefiting nicely from the recent lowering of the corporate tax rate, but also from a booming housing market that is helping it post double-digit sales growth.
Can this kind of growth continue? Let's take a look at D.R. Horton's most recent earnings results to see what kind of runway is left for this stock.
By the numbers
|Metric||Q2 2018||Q1 2018||Q2 2017|
|Revenue||$3.79 billion||$3.33 billion||$3.25 billion|
|Gross profit||$833.1 million||$752.6 million||$701.4 million|
|Net income||$351.0 million||$189.3 million||$229.2 million|
After last quarter's impressive 15% gain in homes closed for the quarter, D.R. Horton could have been forgiven if it didn't meet those same kinds of results this past quarter. Surprisingly, though, it churned out another 15% gain compared to the same time last year with a total of 12,281 homes closed. Equally impressive was that the company was also able to grow its net new orders by 13% to 15,828 for the quarter, which gave it a comfortable level of new orders in excess of its homes closed. This will be an important metric to watch as this housing boom gets long in the tooth.
The average selling price for homes closed in the quarter was more or less unchanged from the prior year and the value of new homes added to backlog were about the same. D.R. Horton ended the quarter with a backlog of 15,841. If you're counting at home, that backlog is less than all net new sales in the quarter. That means D.R. Horton is turning houses over extremely fast and is converting orders to closures in a hurry.
For the second quarter in a row, the company's selling, general, and administrative costs as a percentage of revenue increased to 10.6%. Considering how quickly the company is growing right now and that some of those additional costs are for its subsidiary land development company Forestar Group (FOR 3.80%), it's hard to hold management's feet to the fire on this one. If we were to see sales growth slow down and these numbers continue to rise, though, then it will be something worth watching.
Perhaps the largest influence on the company's bottom line was its lower tax rate. Management estimates that its 2018 tax bill will be around 25%, which is a huge improvement over prior quarters. These lower tax rates and robust growth numbers gave management the confidence to raise its guidance to a net income margin to 12.1% to 12.3% for the year and cash flow from operations to $800 million excluding Forestar's results.
What management had to say
So we have seen housing starts grow to 1.31 million in the past month, which makes it the highest rate since before the housing collapse and is back within the historical averages for the United States. After such a long run of growth, there is likely some concern that the credit profiles of new buyers might be deteriorating and that higher interest rates could scare off potential customers. When asked about this on the call, Jessica Hansen, VP of investor relations, had a surprising response.
We're actually seeing more buyers come in and better-qualified buyers today. As I indicated in the prepared remarks, our FICO score this quarter was 722, which is the highest it's been in several years, and that's with [low price point business line] Express continuing to become a bigger piece of our business. So we're really not seeing rates have any noticeable impact on demand. And for us, it's all about jobs and affordability. So as long as those two things are good, we don't expect an impact on demand even if rates do continue to rise gradually as we move throughout the year, which I think is our expectation today.
This isn't a bubble; it's pent-up demand
After America went through a traumatizing experience from 2007-2009, any long stretch of growth in the housing market is likely going to have people asking if the housing market is getting too frothy and is due for a correction. That is possible, but there are two things that go against that narrative. One is the rate of housing starts. Sure, we're back to historical averages, but we basically had a decade of below-average housing starts in a time when the nation's second largest-age demographic behind the baby boomers (millennials) are entering the market for their first home.
This recent run in earnings results for D.R. Horton and other homebuilders lately confirm this idea. Not only are we seeing double-digit rates of homes closed, but new orders are outpacing closures by a pretty wide margin. D.R. Horton's strategic goals are to capture market share, keep inventory levels low, and potentially grow through acquisitions. With such strong fundamentals backing the housing market right now, it appears to be a formula that could result in at least another good year for its stock and maybe more.