D.R. Horton (DHI), one of the biggest and well-known homebuilders in the nation, came up with mixed fourth-quarter 2014 results on November 11 before the bell but investors’ reacted favorably thanks to the outlook.

Though the housing company’s earnings missed the Zacks Consensus Estimate by a moderate margin of 8.2%, its revenues beat their consensus estimate by 2.1%.

Normally, such a situation leads to a fall in share prices, but a revenue beat along with decent outlook probably spurred optimism among investors and the DHI stock was more than 2% up in the key trading session. The stock also added about 0.6% after hours. Let’s take a look inside the headline numbers:

Behind the Headline Numbers

D.R. Horton’s adjusted earnings of $0.45 per share in the fourth quarter of fiscal 2014 fell short of the Zacks Consensus Estimate of $0.49 probably due to higher cost of sales and increased selling, general and administrative (SG&A) expenses. However, earnings grew 12.5% year over year on solid homebuilding revenues.

Homebuilding revenues of $2.42 billion surged 33% surpassing the Zacks Consensus Estimate of $2.37 billion. Home sales too climbed 33.3% year over year to $2.40 billion thanks to higher closings and pricing gains. Net sales orders rose 38% backed by higher discounts and incentives offered by the company. The cancellation rate was 28%, lower than 31% in the year-earlier quarter.

The stepped-up orders can be attributed to the strategy adopted by the company in the prior quarter. At the third-quarter 2014 conference call, management had revealed its strategy to dispose of older inactive inventory to improve inventory turns, cash flow, and overall return on investment.

Management now expects backlog conversion rate for the first quarter of the next fiscal to be around 75%, which is higher than the historic first-quarter standard. The company expects to complete sales of 34,500 to 37,500 homes in fiscal 2015 for $9.5 billion to $10.5 billion, up from this year’s 28,670 homes for $7.8 billion, as noted by Bloomberg.

ETF Impact

The subtle bullishness over such an important homebuilding stock caused a rally in the broad housing ETFs as confusion appears to fade in the industry. In September, new home sales in the U.S. touched a six-year high. Several market researchers are bullish on the sales prospects of new single-family homes in 2015 (read: Housing ETF Investing 101).

Housing ETFs including SPDR S&P Homebuilders ETF (XHB), iShares U.S. Home Construction ETF (ITB) and PowerShares Dynamic Building & Construction Fund (PKB) added about 1.2%, 1.7% and 0.5%, respectively, on November 11 (read: ETF Winners from Q3 Earnings Season).

DHI takes second spot in ITB with a 10.69% weight and seventh position in XHB with 3.3% exposure. Investors should note that Lennar Corporation (LEN) too had a strong quarter despite soft industry fundamentals. Lennar beat the Zacks Consensus Estimate for both revenues and earnings in Q3. Lennar has about 11.12% weight in ITB and 3.5% weight in XHB. Both ITB and XHB have a Zacks ETF Rank #3 (Hold).

Bottom Line

The homebuilding ETFs space has been muted this year after a stellar run last year. During its Q3 earnings call, D.R. Horton commented that incentives were at rock-bottom levels in fiscal 2013 and early 2014. This played a key role in housing recovery, but incentives are now coming back to normal levels in several markets. To add to this, rising rate concerns will loom large over the space next year.

Still, investors who believe that the companies like D.R. Horton and Lennar can maintain the wining momentum despite a tepid industry; can invest in housing ETFs like XHB and ITB. Investors can always go for single stock pick, but a basket approach will safeguard them against the stock-specific volatility that seems to be inherent to this space as of late (read: 3 Excellent ETFs for a Low Cost Diversified Portfolio).

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