Q1 2014 Home Builder Earnings Mixed Bag: Sterne Agee

Q1 2014 Home Builder Earnings Mixed Bag: Sterne Agee

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.

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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).

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SG&A expenses up

McCanless and Worthman also note that average SG&A expenses were on the rise in the first quarter. First quarter earnings to date show that average SG&A expenses totaled 13.3% of home building revenue (SA estimate 12.6%). This represents an actual 50 bp Y/Y increase versus our -20 bp expectations. We believe slowing overhead leverage is a normal function of the cycle, but we anticipate the effects of additional headcount are more visible this quarter due to a mismatch between the expenses and less offsetting revenues due to winter weather.

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