It's another bad day for housing stocks.
Industry giant DR Horton (DHI) fell 1.4% to $21.30, declining for a third straight trading session since posting disappointing financial results on July 24, the same day the Census Bureau released a weak new home sales report for June. Today's catalyst? More weak housing data and the aftershock from MKM Partners downgrade of the stock from Buy to Neutral amid worries about gross margins.
According to the financial results released last week, D.R. Horton used sales incentives to boost volumes during the previous quarter. So while sales contracts rose 25% in the quarter ended June 30, the gains came at a price. Those incentives drained nearly a full percentage point from the home builder's gross margin.
In Friday's note to investors, MKM analysts Megan McGrath and Ross Sparenblek scolded the company for its "poorly managed earnings call." The pair wrote:
…We think DHI management perhaps suffered from a bit of hubris yesterday, assuming they could “change the conversation” from a focus on gross margins to a focus on return on investment. However, in a quarter when gross margins saw a roughly 200 bps decline, we think this clearly backfired. Although order growth was strong (+25%), investors were not comforted by the margin that needed to be sacrificed to get to that growth level…
In all, D.R. Horton's stock price has fallen 14% since last week's earnings miss. But it isn't the only housing stock suffering today. Data from the National Association of Realtors regarding pending home sales for June failed to live up to expectations, reporting a drop in signed contracts to buy existing home after three months of growth.
Lennar (LEN) fell 2.4% to $37.49 and KB Home (KBH) fell 2% to $17.01. PulteGroup (PHM) sank about 1.3%%.
Housing ETFs including SPDR S&P Homebuilders (XHB) fell 1.56% to $30.27 and iShares U.S. Home Construction ETF (ITB) fell 1.47% to $22.78. PowerShares Dynamic Building & Construction Fund (PKB) lost about 0.75%.
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