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Morningstar | D.R. Horton's 2019 Delivery Guidance In Line With Our Estimate; Spring Selling Season Going Well

Overall, we thought D.R. Horton had a solid fiscal second-quarter performance considering the well-documented housing slowdown that began in the latter half of 2018. After all, organic sales orders, which exclude the contribution from the three homebuilders acquired last quarter, grew 3% year over year, and homebuilding revenue increased over 8%. D.R. Horton's home sales gross profit margin shrank 150 basis points to 19.3% because of increased use of sales incentives and less pricing power to offset higher input costs, but a 19%-plus margin is not outside of the homebuilder's historical range. Furthermore, management said the firm was able to reduce incentives throughout the quarter as demand firmed up. We also weren't disappointed with management's full-year home delivery guidance of 55,000-56,000 homes (an increase of 6%-8% year over year). In fact, we had been modeling 56,100 home deliveries (which we've maintained), and we still think D.R. Horton could do better than this if demand continues to strengthen through the spring and summer. On that note, CEO David Auld said the spring selling season is "going well," and that the housing market "seems pretty solid." The fact that D.R. Horton was able to grow organic sales orders relative to a tough prior-year comparison (sales orders were up 13% during the year-ago quarter) supports Auld's market assessment, in our view.

Clearly, though, the market disagreed with our assessment of D.R. Horton's second-quarter performance and full-year outlook as the homebuilder's stock slumped 5% on April 25. We're maintaining our $47 per share fair value estimate, and while we think the post-earnings sell-off was unwarranted, we don't see it as that compelling of a buying opportunity as D.R. Horton's stock looks about fairly valued at the April 25 closing price of approximately $44.50.

While management acknowledged an increased use of incentives, the average selling price of home deliveries and sales orders declined a relatively modest 1.2% and 1.8%, respectively. We suspect that lower ASPs are more the result of faster growth from D.R. Horton's smaller, more-affordable homes. Indeed, management noted that the average size of homes closed during the quarter was down 3%.