By: Zacks Equity Research

DR Horton (DHI) will release results Friday for its fourth quarter and full year ended Sept. 30. The Texas homebuilder reported a third-quarter profit of 14 cents a share, beating the Zacks Consensus Estimate of 6 cents.

For the fourth quarter, the Zacks Consensus Estimate is pegged at a profit of 15 cents per share, reflecting an annualized growth of 604.8%. There is no upside or downside potential (essentially a proxy for future earnings surprises) for the stock.

Third-quarter recap

Homebuilding revenue dropped 29.2% year over year to $975.4 million in the third quarter, driven by depressed home sales. Revenue failed to meet the Zacks Consensus Estimate of $997 million.

Home sales fell 29.3% year over year to $974.5 million, driven by a 33.1% decrease in home closings to 4,555 homes from 6,805 homes a year earlier. Land sales contributed $900,000 to revenue, down from with $1 million in the prior year.

Net sales orders in the third quarter totaled 4,874 homes, valued at $1.07 billion, compared with 4,921 homes, valued at $1.03 billion in the year-ago quarter. The order-cancellation rate fell 1% from the previous year to 27%. The quarter-end backlog rose 26.4% to 5,600 homes totaling $1.18 billion, from the prior-year backlog of 4,430 homes totaling $954.4 million.

DR Horton’s homebuilding cash and equivalents totaled $1.17 billion at the end of the third quarter, compared with $1.63 billion at the end of the fourth quarter of fiscal 2010. Homebuilding notes payable decreased to $1.76 billion at the end of June from $2.09 billion as of Sept. 30, 2010.

Estimate revisions trend

Earnings estimates for the fourth quarter and for fiscal 2011 are currently pegged at 15 cents and 27 cents per share, respectively. The ongoing weakness in the homebuilding and construction industry induced the analysts to adopt a cautious stance on the company’s performances in the upcoming quarters.

Agreement of estimate revisions

Out of the 14 analysts covering the stock, only one has downgraded the stock in the past 30 days. However, none of the analysts has upgraded in the given period. Of the 13 analysts covering the stock for the full fiscal year, none has either upgraded or downgraded in the past 30 days.

Magnitude of estimate revisions

Following the third-quarter earnings release in July, fourth-quarter earnings per share was projected at 14 cents. However, in the past 30 days, the estimate rose by a penny to 15 cents.

The full-year estimate fell by a penny to 25 cents a share in the last 60 days. However, in the last 30 days, the estimate has increased to 27 cents.

Our take

DR Horton is one of the largest national homebuilders, primarily engaged in the construction and sale of single-family houses in the entry-level and move-up markets. Amid deteriorating home demand, DR Horton is attempting to align supply with demand through attractive incentive schemes.

Further, the company has also managed to execute aggressive land purchasing plans during the economic downturn to capitalize on the availability of cheap lots at vital locations, which would have been expensive in a normal market.

However, higher home-mortgage foreclosures have increased supply and pulled back prices, thereby making the purchase of a foreclosed home an attractive alternative to buying a new home. This has increased competition and reduced the chances of implementing a price rise for residential properties.

Keeping these in mind, the shares of DR Horton are maintaining a Zacks No. 3 Rank, which translates into a short-term hold rating. Alongside, the shares also have a neutral recommendation over the long term.

Read the full analyst report on "DHI"

Zacks Investment Research