(Bloomberg) -- D.R. Horton Inc. shares soared to a record high after the homebuilder reported a stronger-than-expected quarterly profit margin and expectations for lower mortgage rates lifted investor optimism.
The company’s gross margin for the quarter through June was 24%, according to Bloomberg Intelligence analyst Drew Reading. That beat D.R. Horton’s earlier guidance and the consensus of analysts surveyed by Bloomberg. The builder said it expects closings for 90,000 to 90,500 homes for its full fiscal year, which ends Sept. 30. The top end of that forecast also beat analysts’ expectations.
The shares surged 10% to an all-time high of $173.82 at 11:26 a.m. New York time.
While D.R. Horton missed expectations on orders, the results in general fed investor optimism for coming quarters, as many expect the Federal Reserve will start cutting interest rates as soon as September. Executives on the earnings call said the company didn’t lean too heavily on buyer incentives even as elevated mortgage rates caused demand to be choppy. That could set the stage for more growth ahead because many of D.R. Horton’s homes are built on spec, before a buyer is lined up.
The company “chose to not force sales in a tough rate environment, grew its inventory of spec homes in the quarter, and thus effectively deferred sales into the September quarter,” according to a note from Evercore ISI analysts Stephen Kim, Aatish Shah and Randa Shaw. “This is likely to work out well for the company since the demand environment in 3Q is likely to strengthen, on the back of lower mortgage rates.”
More than most homebuilders, the company focuses heavily on first-time buyers. With starter homes in short supply on the resale market, D.R. Horton has been building smaller houses, including townhomes, and subsidizing mortgage rates to lure customers.
Mortgage rates hovered above 7% for much of April and May, which may render the miss on orders “backward-leaning,” according to Reading.
“D.R. Horton’s results suggest that the recent pullback in mortgage rates to below 7% may help to buoy gross margins and demand later in the year,” Reading said.
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