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On Jan 30, we issued an updated research report on D.R. Horton, Inc. DHI, one of the leading homebuilders in the U.S.

The company exhibited an impressive performance in the first quarter of fiscal 2017, with earnings and revenues beating the Zacks Consensus Estimate. The company expects to perform reasonably well in fiscal 2017 on the back of its robust backlog position and well-stocked inventory of land, lots and homes.

1Q17 Recall

The company reported first-quarter earnings of 55 cents per share, beating the Zacks Consensus Estimate by 17%. Total revenue (homebuilding and financial services) of $2.904 billion also surpassed the consensus mark and improved 20.2% year over year. The upside was buoyed by solid homebuilding revenues that grew 19.7% year over year.

Notably, new orders rose 14% that indicates recovery in the housing markets. Each region posted double-digit unit growth, barring the West (+1.2%), with the Midwest (+48%) and Southwest (+37%) leading the list.

The company’s quarter-end sales order backlog (under contract) rose 6% to 11,312 homes. Backlog value grew 7% to $3.4 billion.

Adding more to the positives is the company’s double-digit growth in pretax income. Homebuilding pre-tax income rose 28.4% year over year with pre-tax margin improved 100 basis points (bps) owing to lower selling, general and administrative (SG&A) expenses. Management has consistently made an effort to reduce both construction and SG&A expenses. It controls construction costs by designing homes efficiently and also by obtaining construction materials and labor at competitive prices.

Meanwhile, pre-tax income showed a significant 95.2% year-over-year improvement. Overall, pre-tax income shot up 31.8% and margin 100 bps.

D.R. Horton also maintains a positive outlook for revenues and profits, both of which are expected to increase double digits for the full year, annually, while generating positive cash flow and improved returns.

The company’s strong cash position and low debt/capital ratio allowed it to make strategic land purchases even during the downturn, thus lending it a competitive advantage. The company’s regular investment in homes under construction, land development and finished lots grew over the year to $2.6 billion in fiscal 2013, $2.3 billion in fiscal 2014, $2.2 billion in fiscal 2015 and $2.7 billion in fiscal 2016.

Investments in lots, land and development totaled $847 million in the first quarter, of which $552 million was spent to replenish finished lots and land and $295 million was allotted for land development. The company plans to boost investments to replenish its land and lot supply in 2017 to support revenue growth.

Share Price Performance

Despite D.R. Horton's dominant position as America's largest builder driving closings and gross margins, its shares underperformed the Zacks categorized Building-Residential/Commercial industry. The shares gained 14.4% over the said period, compared with 19.2% growth of the broader market.

One important factor that continues to haunt the industry is the rise in mortgage rates. High mortgage rates dilute the demand for new homes as mortgage loans become expensive.