Research firm Sterne Agee published a research report today, May 5th, highlighting a mixed bag earnings season so far for U.S. home builders. Analysts Jay McCanless and Annie Worthman point out that residential builders are reporting mixed first quarter results, with a decline in unit orders pointing to potential trouble on the horizon. SA rates D.R. Horton, Inc. (NYSE:DHI) as a Buy and the top pick in the sector.
They summarize their perspective in the overview of the report. “In the first two weeks of home builder earnings season we have seen higher-than-expected gross margins, but unit orders, homebuilding revenue, and operating leverage have been short of our expectations to varying degrees.”
Prices going up, orders going down
McCanless and Worthman note that six of the eight home builders which have already reported “F1Q14/F2Q14” earnings have enjoyed double-digit year over year price increases. In fact, the average price growth was 13.2% (SA estimate:15.2%).
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However, the report points out that unit orders for new homes and home deliveries in the first quarter were disappointing. These two key statistics dropped by an average of 2.2% and 1.1% year over year, respectively, compared to Sterne Agee’s estimates of +2.0% and +1.3%.
Home builder: Pricing power leading to strong gross margins
Another development of significance in the home building sector is the pricing power that home builders are luxuriating in currently. The Sterne Agee report highlights that the average home builder gross margin for the quarter is 21.6% to date, compared to their estimate of 20.5%. This figures out to an a 300 bp year over year gross margin improvement (SA estimate: 190 bp).
SG&A expenses up