D.R. Horton Inc. Faces Challenges Amidst Margin Pressure

Shares of D.R. Horton Inc. witnessed a significant selloff, marking the largest dip in nearly four years, as the homebuilder fell short of profit expectations. Margins were impacted by increased incentives to attract new homebuyers, resulting in a decrease in profitability.

Margin Pressure to Persist in the Near Term

D.R. Horton Inc.'s stock (DHI, -9.44%) plummeted 9.6% to reach a six-week low during midday trading. This drop is on course to become the biggest one-day decline since the record-breaking plunge of 20.2% on March 16, 2020. The decline follows the stock's closure at a record high of $157.70 just a day prior.

According to Chief Financial Officer Bill Wheat during a post-earnings conference call, the company anticipates ongoing challenges due to current affordability constraints, which will continue to exert pressure on margins and profitability in the near future. To adapt to changing market conditions, D.R. Horton Inc. has increased the utilization of incentives and reduced home prices and sizes to enhance affordability for potential buyers.

Performance in the Fiscal First Quarter

In the fiscal first quarter ending on December 31, the company reported a net income of $333.3 million, equivalent to $2.82 per share. This figure reflects a decline compared to the $344.2 million in net income, or $2.79 per share, recorded during the same period the previous year.

D.R. Horton Misses Earnings Expectations, but Shows Strong Revenue Growth

D.R. Horton, one of the leading homebuilders in the US, reported lower-than-expected earnings per share for the recent quarter. The company's earnings per share stood at $2.87, missing the FactSet consensus. The dip in home sales gross margin, falling from 25.1% to 22.9%, played a significant role in this below-average performance as it fell well short of expectations, which stood at 24.2%.

Analysts, like Zachary Fadem from Wells Fargo, were taken aback by this unexpected outcome. In a note to clients, Fadem expressed his surprise but maintained an overweight rating on the stock. He believes that despite this setback, the stock still holds strong potential.

On a positive note, D.R. Horton saw a revenue growth of 6.5%, totaling $7.73 billion, surpassing the FactSet consensus of $7.55 billion. Additionally, the number of homes closed during this period jumped 11.5%, reaching 19,340 units, exceeding expectations of 18,731 homes. However, there was a slight decline of 2.8% in the average closing price, which was $376,200 instead of the forecasted $381,620.

Moving forward, D.R. Horton anticipates a home sales gross margin of 22.6% to 23.1% for the second quarter. This projection falls slightly below the current FactSet consensus of 23.6%. On the other hand, the number of homes closed is expected to range from 20,000 to 20,500 homes, a notable increase from the FactSet consensus of 18,731 homes. Additionally, revenue guidance stands at $8.1 billion to $8.3 billion for the upcoming quarter, beating Wall Street's expectations of $7.94 billion.

Despite missing earnings expectations, D.R. Horton has continued to perform exceptionally well in the market. The stock has experienced a remarkable surge of 39.6% over the last three months, outperforming both the iShares U.S. Home Construction ETF (ITB), which increased by 36.4%, and the S&P 500 index (SPX), which gained 15%.