Foolish Forecast: The DR (Horton) Is In

Housing investors are looking for disappointment in Thursday's fiscal Q1 2006 earnings release from homebuilder DR Horton (NYSE:DHI).

Not that the results won't be stellar, mind you. According to analyst estimates, the company likely achieved 24% profits growth over the year-ago quarter, on an 18% rise in sales. Those would be admirable numbers for any company, and certainly for one operating in the housing sector, the doom of which has been foretold for nearly as long as it has boomed.

But if the analyst projections do prove true Thursday, they'll also signal a bit of a slowdown for DR Horton, and by extension, the implication that other homebuilders may be nearing the crest of their own profitability, as well. Last quarter, you see, DR Horton posted 33% growth in net sales orders and 45% growth in revenue (with net profits soaring 61%) over the respective year-ago quarter. So if "all" that DR Horton is able to report achieving is 18% sales growth and perhaps a bit better growth profits, this will nonetheless clearly signify that business is slowing.

There's not much doubt about this anymore. In contrast to the projections and musings of years past, recent months have seen numerous news reports showing that, across the country, housing sales are slowing, housing price appreciation is stalling, and inventories are building ever higher. None of that bodes well for DR Horton and peers such as Lennar (NYSE:LEN), Ryland (NYSE:RYL), Pulte (NYSE:PHM), and KB Home (NYSE:KBH). And DR Horton itself confirmed last week that its net sales orders in fiscal Q1 2006 had come in "only" 19% higher than in Q1 2005.

That said, investors may take heart in the fact that although DR Horton had the opportunity to issue an earnings warning in conjunction with its net sales figure, it chose not to do so. Thus, the company's projection of $0.90 to $0.95 per share in net profits for this quarter, given in the guidance portion of last quarter's earnings release, remains in effect.

It's also worth pointing out that DR Horton has done a great job of improving its business and boosting its margins in recent years. Gross, operating, and net margins have all improved year over year in every quarter as far back as December 2003. The recent trends, for example, look like this:

With performance like that shown above, I suspect it will take more than a housing market slowdown to defeat this business.

Fool contributor Rich Smith has no position in any of the companies mentioned in this article.