* Q1 EPS $0.09 vs est $0.04
* Q1 rev $885.6 mln vs est $896.9 mln
* Shares up 4 pct at year-high
* Net sales orders up 17 pct
* Margins up 120 basis points (Adds conference call details, background; Updates shares)
Jan 27 (Reuters) - D.R. Horton Inc saw orders surge in the first quarter and the top U.S. homebuilder said margins improved as it cut down on discounts, underscoring an upturn in the U.S. housing market.
The company's stock, which has gained more than 70 percent in value since touching a near two-and-a-half year low of $8.03 in October 2011, rose 4 percent to a year-high of $14.71 on the New York Stock Exchange.
Horton said it expects home sales gross margin, which grew 120 basis points to 16.8 percent, to remain in the mid-16 percent range.
The Fort Worth, Texas-based company, which focuses on lower-end homes for first-time buyers, had been hurt as a massive overhang of used and foreclosed homes reduced pricing power for builders of new houses.
Evidence is mounting that a recovery is building up, though the improvement has been erratic.
"If 2012 is the first year of the US housing recovery, we expect it to reflect uneven improvement across our operating markets," Chief Executive Donald Tomnitz said on a conference call with analysts.
Horton has continued to gain market share as lack of financing pushed a number of small and medium-size builders out of the market, CEO Tomnitz said.
The company, which competes with Lennar Corp and PulteGroup Inc, said net sales orders for the first quarter rose 17 percent to $705.6 million.
Orders are a leading indicator for builders, which do not recognize revenue until they close on a home.
The meltdown in the U.S. housing market triggered the 2007-09 recession. Home sales in the country hit an eleven-month high in December and the number of properties on the market was the fewest in nearly seven years.
Lennar, which also posted a sharp jump in quarterly orders, said high rental rates were driving customers to buy new homes, and low home prices and soft interest rates were helping.
Horton posted a first-quarter profit of 9 cents a share, compared with a loss of 6 cents a share a year ago. Revenue rose 15 percent to $885.6 million. The market was expecting earnings of 4 cents a share, according to Thomson Reuters I/B/E/S.
Shares of the company were up more than a percent at $14.32 at midday. The S&P homebuilding sub-industry index was up 0.2 percent while the broader market was down 0.4 percent. (Reporting by Megha Mandavia in Bangalore; Editing by Don Sebastian and Gopakumar Warrier)