Before Wall Street opens on the morning of Thursday, Feb. 7, D.R. Horton will be the next in a string of home builders to release its financial results for the quarter ended Dec. 31, 2007. The financials, which reflect the company's fiscal first quarter of 2008, will be the latest set of metrics on the nation's top home builder by volume since orders in the fiscal fourth quarter plunged by almost 50% to their lowest level in nearly six years. Cancellations soared to 48% as customers backed out of purchases and banks restricted lending.
A conference call with management will be held Feb. 7 at 9:00 a.m. Eastern Time (ET) to discuss the released results. Here's what you should know ahead of the call:
A heavy emphasis on spec building has traditionally set this company apart from its peers. That same strategy works against management in times of strife as inventory levels soar and development dollars are needed to keep feeding the development machine. In recent quarters, the company has talked about a commitment toward reducing its spec inventory levels, though minimal progress has been seen.
A vast majority of the company's land position is in single-family communities. Historically, lots have been controlled with roughly half owned and half optioned. More recently, the effort to scale back on land holdings has shifted that balance to ownership of roughly 65%.
The bulk of Horton's business falls in the entry-level and basic move-up product lines. An ever-tightening lending environment and increasing levels of new- and existing-home inventory will continue to provide challenges.
By comparison to peers, Horton has a low level of joint venture exposure that will help eliminate unexpected financial risk.
Horton maintains a highly diversified footprint, with activity in roughly 80 markets across more than half of the 50 states.
Believers in the "bigger is better" philosophy, Horton was one of the industry's most aggressive land buyers during the boom, but has yet to have taken its lumps in the form of impairments to a degree that is reflective of that aggressiveness. Horton may still have a lot of impairments to realize vs. their public peers.
The hot topic du jour is the ability to generate cash. Horton had a stated goal of achieving $1 billion in cash flow for their fiscal year ended Sept. 30, 2007. The company achieved it, and forecast another $1 billion in 2008. The results posted tomorrow will be closely observed, though the quarter is not the company's strongest cash generation driver and won't definitively indicate its ability to achieve that goal. It will, however, be a reflection of the builder's commitment to land sales (the much publicized $70 million Arizona transaction that came to light last November will be realized here), as well as the vow to pull back on development investment costs. In the last earnings call, management forecast it would keep that spending to under a billion versus the $2.5 billion spent in the last fiscal year.
Consensus among analysts predicts the company will see revenues fall off by about 45%. The company has been aggressive about dropping pricing to move inventory. As a result of the ongoing deterioration of pricing power during the quarter, margins are likely to be measly.
The issue of deferred tax assets is likely to be a hot button. Horton, like the majority of publics, is audited by Ernst & Young, which is insisting companies take a FAS 109 charge before it will put its stamp on their financials.