Year-to-date, the company has been successful in generating cash flow, lowering land lots owned and optioned and cutting the number of homes in inventory. Also, the company announced that it would cut the quarterly dividend by half to $0.075 per share in an effort to preserve $94.5 million in annual capital. For the remainder of FY08, we expect gross margin pressure to continue from weaker average selling prices and increased incentive use. Our target price is $11.50.
Amid deteriorating home demand, we applaud DHI's continued four moves to bring supply in line with demand. First, it has decided to reduce future starts. Second, it will make lesser land investments in FY08. Third, amid higher cancellation rates and low home affordability, it makes complete sense for DHI to walk away from the purchase of land under option contracts. Fourth, the company understands that overhead costs remain too high relative to demand.
The management stated that it is continuously focusing on managing selling, general and administrative (SG&A) expenses. We do believe the management will be able to successfully adjust its overhead costs to lower levels. Our expectation is for SG&A to decline to 12% of sales by year-end fiscal 2008.
The company is also focused on driving down its inventory level. Unfortunately, inventory reduction from lower starts is unlikely to bring back double-digit volume growth. A high level of cancellation rates is another cause of concern.
CTC Getting a "Chile" Reception
Compañía De Telecomunicaciones De Chile S.A. (CTC) provides a range of telecom services in Chile. The company lost a primary driver of revenue and earnings growth when it divested its wireless business. The sale of its wireless operations limits long-term growth prospects.
Declining revenues from the company's long distance business, due to competitive alternatives and recent regulatory developments surrounding the proposed hike in fixed-line tariffs, remain concerning. Performance in the most recent quarter also has been tepid. With these declines, the company has undertaken substantial cost-cutting measures and, therefore, it may be difficult for CTC to reduce operating expenses much further without impairing existing operations.
On the positive side, continued growth in IPTV services coupled with strong momentum in broadband business and service bundling (offering voice telephony, broadband and pay TV under a single platform) offset the losses in fixed telephony business. The company also maintains a healthy dividend payout, which may be attractive to income oriented investors as CTC distributes 100% of its net income in cash dividends.
Furthermore, debt reduction is expected as reduced capital expenditures for the fixed-line business, relative to the former wireless business, translates into healthy free cash flow, which will be used to pay down financial obligations. The outlook for 2008 remains tepid. We maintain our Hold rating with a six-month price target of $7.50 based on approximately 5x EV/EBITDA for 2008.
