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Will D.R. Horton (DHI) Beat Earnings Estimates This Quarter?

PHM DHI RYL MDC

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Homebuilder D.R. Horton Inc. (DHI - Analyst Report) is scheduled to report third quarter fiscal 2013 (ending Jun 30) earnings before the opening bell on Jul 25, 2013.

Last quarter, D.R. Horton posted a positive surprise of 60%. We expect the company to beat expectations in the third quarter too.

Why a Likely Positive Surprise?

Our proven model shows that D.R. Horton is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: The expected surprise prediction or ESP (Read: Zacks Earnings ESP: A Better Method), which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +8.57%. This is meaningful and a leading indicator of a likely positive earnings surprise for the shares.

Zacks Rank #1 (Strong Buy): D.R. Horton carries a Zacks Rank #1 (Strong Buy). Note that stocks with a Zacks Rank #1, #2 and #3 have a significantly higher chance of beating earnings estimates. The sell rated stocks (#4 and #5) should never be considered going into an earnings announcement. 

The combination of D.R. Horton’s Zacks Rank #1 (Strong Buy) and a positive ESP of +8.57% makes us confident of an earnings beat on Jul 25.

What is Driving the Better-than-Expected Earnings?

We believe that the steadily improving housing conditions will boost both volume and prices for D.R. Horton homes in the third quarter despite recent concerns about rising interest rates.

We believe that though interest rates are increasing of late, they are still below historical levels and housing is still increasingly affordable. Homebuilders have largely benefited from historically-low interest rates, eventually leading to the sharp increase in home buying activity since mid-2012. Moreover, Federal Reserve Chairman, Ben Bernanke’s comments last week to keep interest rates low for some time has also provided some relief to the housing industry. Low interest rates increase demand for new homes as mortgage loans become cheaper; thus improving the purchasing power of the buyer.

In addition to the brisk housing recovery, increased investments in land in high-demand markets, efficient inventory management and improved selling, general and administrative (SG&A) expense ratio are expected to boost profits for D.R. Horton in the upcoming quarters.

D.R. Horton has been witnessing solid year-over-year growth in new home orders, average selling prices and home closings for the past few quarters. D.R. Horton has in fact delivered 6 consecutive positive earnings surprises, with an average of 31.25% for the past four quarters.

Other Stocks to Consider

Here are some other homebuilding companies that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:

PulteGroup, Inc. (PHM - Analyst Report), Earnings ESP of +3.45% and Zacks Rank #1.

MDC Holdings Inc. (MDC - Snapshot Report), Earnings ESP of +3.64% and Zacks Rank #1.

Ryland Group Inc (RYL - Snapshot Report), Earnings ESP of +15.63% and Zacks Rank #1.

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