D.R. Horton Inc.’s (DHI - Analyst Report) adjusted earnings of 45 cents per share in the fourth quarter of fiscal 2014 missed the Zacks Consensus Estimate of 49 cents by 8.2%. However, earnings increased 12.5% year over year on the back of solid homebuilding revenues.

D R Horton, Inc - Earnings Surprise | FindTheBest

We believe that the earnings miss was due to higher cost of sales and increased selling, general and administrative (SG&A) expenses.    

Quarter Details

Homebuilding revenues of $2.42 billion climbed 33% year over year and beat the Zacks Consensus Estimate of $2.37 billion by 2.1%. Home sales increased 33.3% year over year to $2.40 billion attributable to higher closings and pricing gains. Land sales contributed $19.7 million to revenues, up 24.7% from the prior-year quarter.

Net sales orders rose 38% year over year to 7,135 homes helped by higher discounts and incentives offered by the company in the quarter. Orders increased in all the operating regions. The value of net orders grew 41% to $2.0 billion. Cancellation rate stood at 28%, higher than 24% in the previous quarter.

The increase in orders can be attributed to the new strategy adopted by the company in the prior quarter. At the third quarter 2014 conference call, management had revealed its strategy to dispose off older inactive inventory to improve inventory turns, cash flow, and the overall return on investment.

The company will now focus on improving sales pace in many communities across its markets in order to achieve a 20% return on inventory. In an effort to improve the sales pace, management increased the level of incentives in many communities.

Home closings increased 25% year over year to 8,612 homes in the reported quarter. While closings rose in East, Southeast, West and South Central, it continued to decline in the Midwest and Southwest.

The quarter-end sales order backlog rose 21% year over year to 9,888 homes. Backlog value grew 29% to $2.9 billion. Except Southwest, backlog increased in all other regions. Sales order backlog represents homes under contract but not yet closed at the end of a certain period.

Gross profit on home sales was $492.0 million, up 24.6% year over year.

SG&A expenses were $241.0 million, up 29.2% from the prior-year quarter. The company has been investing in its SG&A infrastructure to support growth in the prior quarter.

Homebuilding pre-tax income was $236.6 million, up 24.9% year over year. Pre-tax income from financial services came in at $14.2 million, up 6% year over year. Consolidated pre-tax income was $250.8 million in the quarter, up 24% year over year.

D.R. Horton declared a quarterly cash dividend of $0.0625 per common share, payable on Dec 15, 2014 to stockholders of record as of Dec 1, 2014.

Fiscal 2014

Despite a 12.8% year-over-year increase, D.R. Horton’s adjusted earnings of $1.50 per share in fiscal 2014 missed the Zacks Consensus Estimate of $1.56 by 3.8%.

Homebuilding revenues of $7.86 billion also missed the Zacks Consensus Estimate of $7.95 billion by 1.1%. However, homebuilding revenues climbed 29% year over year.

D.R. Horton carries a Zacks Rank #4 (Sell).

Other Stocks to Consider

Better-ranked stocks in the building and related sector include Hovnanian Enterprises Inc. (HOV - Snapshot Report), Lennar Corp. (LEN - Analyst Report) and NVR, Inc. (NVR - Snapshot Report). While Hovnanian Enterprises sports a Zacks Rank #1 (Strong Buy), Lennar Corp. and NVR carry a Zacks Rank #2 (Buy).