(Reuters) - D.R. Horton Inc (DHI.N), the biggest U.S. home builder, posted higher-than-expected quarterly profit as its net sales rose 21 percent, closing its most profitable fiscal year since the housing peak in 2006.
Low rates and falling inventories have helped lift sales for U.S. homebuilders as a whole. D.R. Horton is helped by its broad range of clients across a broad swath of the United States.
“They have the most diverse geographic footprint in the industry and just know how to read the entire market,” said Williams Financial analyst David Williams.
The company’s fourth quarter sales were strong, but its shares were down about 3 percent in afternoon trading because D.R. Horton is not improving its profit margin as sales ramp up, raising questions about whether it can keep a lid on growing costs as the market improves.
“What we would like to hear is if there is a possibility that there can be incremental improvement on the margins,” said Megan McGrath, an analyst at research firm MKM Partners
There is also the perception among some that home builder valuations are puffed up.
For a solid year now, the sector has been on a spectacular tear, with Horton’s shares up 65 percent.
Not every home builder is benefiting equally from growing demand, however. Horton’s smaller rival, Beazer Homes USA Inc (BZH.N), has been one of the industry’s poorest performers. On Monday, it reported an 11 percent increase in quarterly revenue. But its net loss widened as it recorded a debt extinguishment charge of $42.4 million.
Beazer Homes shares were down 13 percent at $14.46 in afternoon trading.
Horton has long focused on first time buyers in poorer communities, even going so far as to repair the credit of buyers so they can qualify to purchase a home. [ID:nL2E8JUIN2] About 59 percent of Horton’s customers use the company’s in-house mortgage lending unit to finance their new properties.
Since the housing crash, Horton has also started to focus on buyers moving up to better properties in wealthier communities who spend more on custom designs and add-on features. The company’s prices now span a range from $90,000 to $600,000.
“We don’t want to leave that move-up buyer to any of our competitors,” said Chief Executive Officer Donald Tomnitz on an earnings call with analysts on Monday.
Horton said its fourth quarter sales order backlog of homes under contract rose 49 percent from the same quarter last year to 7,240 homes.
Fort Worth, Texas-based Horton said net sales orders increased 24 percent to 5,276 homes. The value of net sales orders rose 35 percent to $1.3 billion.
“They delivered strong orders. That has been the important part of the story,” said Stephen East, an analyst with ISI Group.
Risks abound for home builders, most notably in the labor markets. Home prices can only rise so much without employment and wage growth.
“I still don’t see a lot of jobs being created,” said Tomnitz. “Potential layoffs in a number of industries - especially the defense industry - could adversely affect our business.”
Horton’s net income rose to $100.1 million, or 30 cents per share, for the quarter ended September 30 from $35.7 million, or 11 cents per share, a year earlier.
Homebuilding revenue rose to $1.3 billion.
Analysts on average were expecting earnings of 28 cents per share, on revenue of $1.35 billion, according to Thomson Reuters I/B/E/S.
Reporting by Bijoy Koyitty in Bangalore; Editing by Roshni Menon, Joyjeet Das and Andre Grenon