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Q3 Earnings Might Turn Things Around for Homebuilding: 7 Stocks

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One should expect the Zacks Building Products - Home Builders industry to do well in the third quarter of 2020, buoyed by record-low interest rates and strong pent-up demand following the government's easing of coronavirus-led restrictions.

What’s Working in Favor?

After a pause in homebuyer demand in mid-March that extended through the end of April due to widespread stay-at-home orders and surging national unemployment, the industry has witnessed a V-shaped recovery since May throughout the country. A combination of low interest rate, lack of available supply and highly-motivated buyers has been helping boost sales.

Again, companies’ focus on entry-level buyers has been increasing. Continued focus on growing demand for entry-level homes and addressing the need for lower-priced homes given affordability concerns prevailing in the U.S. housing market have been helping companies boost profitability.

Despite economic uncertainty and continuously tight inventory levels, homebuilders are extremely positive on market prospects given the rising demand and the suburban shift for homebuilding backed by low interest rates. The National Association of Home Builders or NAHB and Wells Fargo Housing Market Index rose five points to 83 in September – the highest the association has seen since its inception 35 years ago, according to a release from the NAHB on Sep 16. The association's housing market index, which gauges the single-family housing market, marks the fifth consecutive improvement of the index in September.

Solid home sales data depicts the true picture of this resilient market. Pending home sales in August continued to rise, marking the four uninterrupted month of positive contract activity, according to the National Association of Realtors or NARs. Also, existing-home sales hit the highest level in August since December 2006. It also marked three consecutive months of sales gains. Furthermore, new single-family homes were recorded in levels not seen since before the Great Recession. There were 1.01 million newly-built homes sold in August, according to the Census Bureau’s monthly report. Notably, the metric has been rising for four consecutive months.

Solid Q3 Expectations

The overall estimate picture is an encouraging one for the broader construction sector. Per the latest Earnings Preview, construction sector earnings are expected to increase 11.1% in Q3, compared with a decline of 0.7% in the second quarter. Revenues are projected to increase 3.9% in Q3 against a 1.8% decline in Q2.

Notable Q3 Releases So Far

For a quick flashback, the third-quarter 2020 results of industry biggies like Lennar Corporation (LEN - Free Report) and KB Home (KBH - Free Report) have been encouraging, defying unprecedented health crisis. Lennar reported better-than-expected results for third-quarter fiscal 2020 (ended Aug 31, 2020), marking the sixth straight quarter of an earnings beat. Furthermore, KB Home came up with better-than-expected results for third-quarter fiscal 2020 (ended Aug 31, 2020) on solid housing gross margin.

Which Are the Right Picks?

Despite coronavirus-related disruptions, higher input costs and trade tensions, the homebuilding space looks attractive on lower borrowing costs and lack of supply.

Given the headwinds, it is not easy to find stocks with the potential to trump earnings estimates. Here, the Zacks methodology comes in handy as it helps identify stocks that not only boast solid fundamentals but are also poised to beat estimates this earnings season.

One can trim down the list with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter.

Our research shows that for stocks with this combination, the chances of a positive earnings surprise are as high as 70%.

Earnings ESP is our proprietary methodology for determining stocks that have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Winning Stocks

For investors willing to adopt this strategy, we have highlighted seven homebuilding stocks that may stand out this earnings season.

Our first choice is D.R. Horton, Inc. (DHI - Free Report) — a Texas-based homebuilder. The company topped earnings estimates in the trailing four quarters, the average surprise being 16.78%. The company is likely to beat expectations when it reports third-quarter 2020 results on Nov 10.

The company carries a Zacks Rank #2 and has an Earnings ESP of +9.40%. You can see the complete list of today’s Zacks #1 Rank stocks here. Its industry-leading market share, solid acquisition strategy, well-stocked supply of land, lots and homes along with affordable product offerings across multiple brands are expected to drive growth.

D.R. Horton, Inc. Price and EPS Surprise

D.R. Horton, Inc. Price and EPS Surprise

D.R. Horton, Inc. price-eps-surprise | D.R. Horton, Inc. Quote

Next in line is Century Communities, Inc. (CCS - Free Report) . Headquartered in Greenwood Village, CO, this homebuilder is engaged in the design, development, construction, marketing, and sale of single-family attached and detached homes. The company beat earnings estimates in three of the last four quarters and met the same in one accession, the average beat being 28.75%.

The company is poised to beat expectations when it reports third-quarter 2020 results on Oct 28. This Zacks Rank #1 company has an Earnings ESP of +7.53%. Continued focus on its strategic goal of capturing an ever-increasing share of entry-level homebuyer demand has been driving growth.

Century Communities, Inc. Price and EPS Surprise

Century Communities, Inc. Price and EPS Surprise

Century Communities, Inc. price-eps-surprise | Century Communities, Inc. Quote

We are also counting on NVR, Inc. (NVR - Free Report) — a Reston, VA-based homebuilder. The company beat earnings estimates in three of the last four quarters, the average beat being 4.97%. The company is poised to beat expectations when it reports third-quarter 2020 results.

The company carries a Zacks Rank #1 and has an Earnings ESP of +6.79%. NVR’s solid business model and backlog level are likely to support growth.

NVR, Inc. Price and EPS Surprise

NVR, Inc. Price and EPS Surprise

NVR, Inc. price-eps-surprise | NVR, Inc. Quote

Another compelling pick is PulteGroup, Inc. (PHM - Free Report) , an Atlanta, GA-based homebuilder. The company beat earnings estimates in the last four quarters, the average beat being 14.49%. The company is poised to beat expectations when it reports third-quarter 2020 results on Oct 22.

The company carries a Zacks Rank #1 and has an Earnings ESP of +5.99%. The company’s prudent land investments strategy and focus on growing demand for entry-level homes and addressing the need for lower-priced homes given affordability concerns are encouraging.

PulteGroup, Inc. Price and EPS Surprise

PulteGroup, Inc. Price and EPS Surprise

PulteGroup, Inc. price-eps-surprise | PulteGroup, Inc. Quote

Next pick is Meritage Homes Corporation (MTH - Free Report) , this Scottsdale, AZ-based homebuilder designs and builds single-family homes in the United States. The company beat earnings estimates in the last four quarters, the average beat being 39.99%.

The company is poised to beat expectations when it reports third-quarter 2020 results on Oct 21. This Zacks Rank #1 company has an Earnings ESP of +2.34%. The company’s focus on entry-level LiVE.NOW homes bodes well.

Meritage Homes Corporation Price and EPS Surprise

Meritage Homes Corporation Price and EPS Surprise

Meritage Homes Corporation price-eps-surprise | Meritage Homes Corporation Quote

Our sixth choice is M.D.C. Holdings, Inc. (MDC - Free Report) , a Denver, CO-based homebuilder. The company beat earnings estimates in two of the last four quarters and missed in two occasions, the average beat being 11.27%.

The company is poised to beat expectations when it reports third-quarter 2020 results on Oct 29. This Zacks Rank #1 company has an Earnings ESP of +1.67%. The company’s continued shift in focus toward more affordable homes and benefits of its build-to-order strategy are likely to have driven performance in the quarter-to-be reported.

M.D.C. Holdings, Inc. Price and EPS Surprise

M.D.C. Holdings, Inc. Price and EPS Surprise

M.D.C. Holdings, Inc. price-eps-surprise | M.D.C. Holdings, Inc. Quote

The final name on our list is Toll Brothers Inc. (TOL - Free Report) — this Horsham, PA-based company is a leading luxury homebuilder. The company beat earnings estimates in three of the last four quarters, the average beat being 13.44%.

The company is poised to beat expectations when it reports its quarterly results. This Zacks Rank #1 company has an Earnings ESP of +0.14%.

Favorable housing backdrop, lack of competition in the luxury new home market and buyout synergies have been working in favor of the company.

Toll Brothers Inc. Price and EPS Surprise

Toll Brothers Inc. Price and EPS Surprise

Toll Brothers Inc. price-eps-surprise | Toll Brothers Inc. Quote

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