Morningstar | D.R. Horton's Preliminary 4Q Home Deliveries Miss Not a Reason for Investors to Panic. See Updated Analyst Note from 09 Oct 2018
On Oct. 9, no-moat-rated D.R. Horton released select fiscal fourth-quarter data ahead of its Nov. 8 earnings call. While home deliveries were up 11% year over year, the 14,674 homes delivered during the fourth quarter missed the midpoint of management's guidance by about 3%. This guidance miss shouldn't have surprised investors, in our view, given that just about a week earlier, Lennar slightly lowered its guidance for home deliveries and orders because of "Hurricane Florence...and a bit of sluggishness in today's markets." In our Sept. 13 analyst note, we remarked that approximately 13% of D.R. Horton's active communities are in North and South Carolina. As such, we had expected some hurricane-related delays would cause D.R. Horton to miss its home delivery guidance. Actual deliveries missed our estimate by less than 1%.New order volume during the quarter grew 11% year over year, but order growth decelerated throughout fiscal 2018. We believe this slowdown in new orders is due to a lower community count versus last year. Indeed, D.R. Horton's fourth-quarter community count was down 3% versus the year-ago quarter. After adjusting for community count, our calculations tell us demand pace improved year over year, from 2.2 homes per community per month in the fourth quarter of 2017 to a 2.5 community absorption pace this quarter.
The average selling price of delivered homes fell 2.6% versus last year. We believe lower ASPs are more the result of a continued demand shift to D.R. Horton's lower-priced Express and Freedom homes than weakened demand. Indeed, Express and Freedom homes accounted for 40% of delivered homes in the fourth quarter compared with 35% last year. While we had expected a continued shift to lower-priced homes, it's moving faster than we had anticipated. As such, we lowered our ASP assumptions to model a higher mix of such homes, which caused our fair value estimate to decline about 2% to $44 per share.
The average selling prices of Express Homes ($244,700) and Freedom Homes ($274,700) increased 5.2% and 3.6% year over year, respectively. The limited supply of affordable homes has not kept pace with demand, which has driven the price up for such homes. The ASPs of midpriced Horton Homes and high-end Emerald Homes declined 3% and 4.2%, respectively. We think the decline in Horton Homes' ASP is probably due to a geographic mix shift (that is, greater demand in more affordable housing markets). With an ASP of $317,200, we consider Horton Homes to still be relatively affordable, so we don't think the lower ASP is the result of softening demand for higher-end homes, which could be to blame for the drop in Emerald Homes' ASP ($609,300). However, the decline in Emerald Homes' ASP could also be due to a geographic mix shift. We'll have a better understanding of price dynamics when D.R. Horton's full fourth-quarter financial data is released Nov. 8.
During D.R. Horton's fiscal third-quarter earnings call, management issued preliminary fiscal 2019 guidance calling for 10%-15% consolidated revenue growth. Management hasn't seemed to back away from this target. The Oct. 9 press release included a comment from chairman D.R. Horton stating, "We continue to expect strong performance over the next year and are well positioned to grow our consolidated revenues at a double-digit pace."
D.R. Horton is a homebuilding company. The company's business operations consist of homebuilding, a majority-owned residential lot development company, financial services and other activities. The company's financial services operations provide mortgage financing and title agency services to homebuyers in its homebuilding markets. The company's subsidiary, DHI Mortgage, provides mortgage financing services primarily to its homebuyers and generally sells the mortgages it originates and the related servicing rights to third-party purchasers. The company's subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to its homebuyers.
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