August 3, 2010 / 11:15 AM / 9 years ago

UPDATE 4-D.R. Horton posts profit, but tough years ahead

* EPS 16 cents, in line with analyst estimates

* Closings up 60 pct

* Orders down 3 pct, less than expected

* CEO Tomnitz sees 2011, 2012 as tough years

* Shares down 4.9 pct (Rewrites first paragraph, adds executive quotes, updates shares)

By Helen Chernikoff

NEW YORK, Aug 3 (Reuters) - D.R. Horton Inc (DHI.N) posted a quarterly profit that met Wall Street expectations, but shares of Horton and rival builders fell amid pessimistic commentary about the broader housing market from the largest U.S. homebuilder.

Horton reported earnings of $50.5 million, or 16 cents per share, for its fiscal third quarter that ended June 30, in line with analysts’ estimates, according to Thomson Reuters I/B/E/S.

A year earlier, Horton posted a loss of $143.8 million, or 45 cents per share.

Closings jumped 60 percent to 6,805 homes, reflecting the rush by buyers and builders to seal deals before the federal homebuyer tax credit’s June 30 deadline for closings. The deadline for orders was April 30.

But homebuilders are in for a rough few years now that the tax credit era has ended, said Horton Chief Executive Don Tomnitz.

“I think 2011 and 2012 both are going to be tough years,” Tomnitz told a conference call. “I just don’t see any sustainability of growth or profitability until we get some jobs created in this country and until consumer confidence improves.”

The National Association of Realtors' Pending Home Sales Index for June fell to a historic low of 75.7 from 77.7 in May, disappointing expectations of a 0.6 percent increase. For a graphic of pending home sales by region click:

“Like the housing market, these stocks are still in the process of bottoming,” said Morningstar analyst Mike Gaiden.

Horton shares were down 4.9 percent to $10.70 in early afternoon trading, while industry No. 2 PulteGroup Inc (PHM.N) was down 5.1 percent and third-ranked Lennar (LEN.N) down 2.8 percent.

Morningstar has a fair value estimate of $16 on the shares, meaning it sees them as roughly 30 percent undervalued.

The company did a good job of building up its inventory to meet demand generated by the tax credit and converting it into sales, Gaiden said.

Horton’s second-quarter orders fell, but only by 3 percent, far less than rivals have reported and Wall Street had expected.

Ticonderoga Securities analyst Stephen East had forecast an 18 percent decline, while JP Morgan analyst David Rehaut had expected a 15 percent drop.


June and July saw a modest rebound in sales, likely driven by Horton’s tendency to discount and increase incentives, UBS analyst David Goldberg wrote in a note.

The builder has long been known for its focus on the first-time buyer and a strategy of pursuing market share by building homes in advance of orders in the hope of selling them, and then slashing prices if necessary.

Horton’s recent pricing practices in Houston, near its Fort Worth, Texas, headquarters, also indicate it may be ramping up its standard operating procedure to cope with the fall-off in demand since the tax credit’s expiration.

“Horton is by far the most aggressive” in cutting prices, said Lance Wright, a co-owner of CastleRock Communities, which builds about 500 homes a year, 400 of those in Houston.

Wright said Horton is offering liquidation-type incentives to try to clear out inventory it built up in anticipation of sales driven by the tax credit.

The ultimate result could be another decline in home prices as Horton, the heavyweight, forces competitors large and small to follow suit, said Jody Kahn, a consultant to homebuilders with John Burns Real Estate Consulting, based in Irvine, California. (Reporting by Helen Chernikoff; Editing by Dave Zimmerman, John Wallace and Tim Dobbyn)

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