D.R. Horton Stable Thru the Storm
D.R. Horton, Inc. (DHI) reported third quarter loss of $1.26 per diluted share. This is due to weaker gross margins, higher-than-anticipated overhead costs, and larger-than-expected charges for inventory impairments and write-offs of deposits related to land option contracts.
Year-to-date, the company has been successful in generating cash flow, lowering land lots owned and optioned and bringing down the number of homes in inventory. We applaud the management's decision to generate additional cash flow by reducing its FY09 land and land development expenses to $250 million from the $750 million expected in FY08 and the $2.5 billion spent in FY07.
The company is also focused on driving down its inventory level. At the end of the third quarter of FY08, the total number of homes in inventory was approximately 15,400, consistent with the previous quarter and down 43.2% from 27,100 homes at the end of 3Q07.
D.R. Horton trades at a book value of 1.1, which is at par with the industry mean multiple. Typically, homebuilders tend to bottom with book values near 1. Consequently, we believe the shares are pricing in more risk than they have been in the last couple of years. As such, we recommend investors Hold shares of DHI through the downturn and earn a dividend yield of 2.19% in the process. Until housing demand stabilizes, we see no reason to build up the land lot position above the current 5.4 months supply. Our target price is $14 per share.
LMT an Aggressive Defense Play
Lockheed Martin Corp. (LMT) appears well positioned to continue to benefit from strong defense outlays through 2008-09, debt repayment and an ongoing share repurchase program since October 2002. Solid operating results, higher margins, particularly in the electronic systems segment, via existing and new contracts, both domestic and international, collectively offset lower fighter jet business and continue to deliver strong earnings and cash flow growth.
The management's increased 2008 guidance supports the bullish outlook. Additionally, the company's dividend was recently increased by 20%. Accordingly, we maintain a Buy recommendation on LMT common stock, with a six-month target price of $123.75.
Price appreciation to our near-term valuation target, coupled with the increased $0.42 per share quarterly dividend, which we consider sustainable and secure based on low projected earnings payouts represents annualized total return potential of 17.2%.
Lockheed Martin's EPS increased by 18% in the second quarter of 2008 compared to the prior-year quarter. Likewise, operating EPS increased 12.9% year-over-year to $2.01. During the quarter, net earnings increased by 13% to $882 million from $778 million recorded in the year-ago quarter.
The management increased the company's outlook for 2008 net sales, EPS, cash from operations and return on invested capital (ROIC). Continuing its share repurchase program, the company bought back almost 7.3 million shares of its stock during the second quarter and 18.6 million shares in the first six months of 2008. Lockheed Martin distributed $168 million as cash dividends. It also announced the planned redemption of the $1 billion of its floating rate convertible debentures, due 2033, on August 15, 2008.
NuStar Energy Shining Brightly
NuStar Energy L.P. (NS) is expected to post solid third-quarter results on the back of stronger margins and higher sales volumes from the new asphalt business and increased pipeline throughput. We continue to like the partnership for its diversified asset base and strong distribution-growth prospects. Our new $56 price objective, up from $54 before, reflects a distribution run rate of $4.25 per unit and yield of 7.65%.
The inclusion of the asphalt business in the asset mix further adds to the partnership's diversification and growth prospects. A strong pipeline of organic growth projects and contribution from acquisitions provide the partnership with an above peer-group average distribution coverage ratio. NuStar's current quarterly distribution of $0.985 per unit represents an attractive yield of 8.15%. We estimate that the partnership can sustain distribution-growth in the 8%-9% annual range over the next few years.
The recent acquisition of CITGO's asphalt assets helps diversify the partnership s operations and further increases its growth prospects. The partnership currently has a number of ongoing projects, which are expected to start contributing to results over the next twelve months.
On August 29, NuStar provided interim third-quarter guidance.
