D.R. Horton's Profit Increases
In a Slowing Housing Market

Home builder D.R. Horton Inc. reported net income in the latest quarter rose 20% on higher sales, even as the U.S. housing market shows signs of cooling.

For its fiscal second quarter ended March 31, the Fort Worth-based company reported net income increased to $352.8 million, or $1.11 per share, compared with $294 million, or 92 cents per share, a year earlier.

Revenue jumped 25% to $3.6 billion as the company closed on 12,570 homes, a 19% rise from a year earlier.

Horton, which typically caters to first- and second-time home buyers, said last week it posted its highest quarterly net sales orders in the second quarter. That figure rose 10% to 15,771 homes from a year earlier.

Other large home builders have seen orders slip this year, a trend that will be reflected in their revenue a few quarters down the line. Last month, Los-Angeles-based KB Home reported a 12% decline in first-quarter orders. In February, Toll Brothers Inc., a luxury home-builder based in Horsham, Pa., announced a 29% decline in first-quarter orders. Miami-based Lennar Corp. said its orders increased 4% during its first quarter.

Horton did say the percentage rate of cancellations on new homes has risen to the "low 20s," above the company's historic range of about 17% to 19%.

Donald Tomnitz, Horton's chief executive, said the company has increased its incentives to help drive sales. "If incentives continue, and I believe they will continue, there is a possibility that margins could soften in the third and fourth quarters," Mr. Tomnitz said in an interview. "But they will remain at a very high level."

"Horton shares rose 75 cents, or 2.2%, to $34.15 in 4 p.m. composite trading on the New York Stock Exchange.

Still, analysts say Horton has been able to increase its orders in a slowing market, in part because it builds in several dozen markets and is not overly exposed to cities where homes sales are slowing the fastest. Margaret Whelan, an analyst at UBS, says the company has been successful at "finding incremental markets where they can be the big fish in the small pond." Analysts also say Horton has been able to sell lower-priced homes at a time when prices in many markets have gotten out of reach of many prospective buyers.

"We have experienced a changing market for the past four to five months...and we are positioned exactly where we want to be," Mr. Tomnitz said. In the second quarter, Horton said its strongest markets included Austin, Texas; Atlanta; and the Carolinas. Its softer markets included Washington, D.C., and Salt Lake City. The company has entered some new markets including Boise, Idaho.

Horton remains optimistic that it can close on roughly 58,000 homes and generate more than $15.5 billion in revenue in fiscal year 2006. The company reiterated 2006 earnings-per-share guidance in the range of $5.25 to $5.35.

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