The largest U.S. homebuilder fell in line with overall earnings trends in the sector, posting a surge in profits even as property orders tumbled.
D.R. Horton (DHI) posted net income of $139.5 million for the fourth quarter, a 39% jump from $100.1 million a year earlier.
The impressive profitability is a direct result of a combination of lower land acquisition costs and pricing power, explained Jay McCanless, a vice president and senior equity analyst.
"With the exception of one of my companies that I follow this has been the story of this earning season. The order growth has been slow, but profitability has been higher," McCanless said.
D.R. Horton reported a 2% fall in quarterly orders due to a restrictive mortgage environment, particularly extremely tight underwriting standards and rising mortgage rates.
"Until we see some sort of relief in the environment, we won’t see the order numbers move up," McCanless noted.
D.R. Horton’s net orders fell to 5,160 homes in the fourth quarter, down from 5,276 orders a year earlier.
Additionally, the value of net sales orders increased from $1.3 billion to $1.4 billion, up 14% from last year.
On a similar note, Morningstar analyst James Krapel pointed out that reduced affordability from new home price appreciation and higher mortgage rates took a toll on new orders.
"D.R. Horton did note better order trends in October, but sales activity remains muted relative to earlier this year," he said. "We expect rates will be the primary determinant whether the all-improvement spring selling season will be a success or not."
Net sales orders for the fiscal year ended Sept. 30, increased to 25,120 home from 21,048 homes, rising 19% from a year earlier.
D.R. Horton’s sale order backlog of homes under contract increased to 8,205 homes from 7,240 homes, up 13% from the previous year.
Consequently, the value of the backlog grew to $2.2 billion from $1.7 billion, rising 33% from a year earlier.
Going into the fourth quarter, Sterne Agee was concerned the homebuilder would heavily discount homes started without contracts to drive up volume, but this was not the case.
Actually, D.R. Horton’s gross margin of 21.9% was 90 basis points ahead of analyst expectations despite the cancellation rate growing 400 basis points year-over-year to 31%.
"Assuming the fourth quarter gross margin beat means D.R. Horton is being judicious about discounting and incentives to the consumer, we view that as a positive read-through for profitability for the quarter," McCanless pointed out.