PulteGroup Inc. (PHM - Free Report) is set to report third-quarter 2016 results on Oct 20, before the market opens.
Last quarter, it had posted a positive earnings surprise of 12.12%. However, the company missed estimates in only one out of the past four quarters, resulting in an average positive surprise of 7.30%.
Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that PulteGroup is likely to beat earnings because it has the right combination of two key ingredients.
Zacks ESP: PulteGroup has an Earnings ESP of +4.65%. That is because the Most Accurate estimate is 45 cents while the Zacks Consensus Estimate is pegged lower at 43 cents. This is a meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: PulteGroup has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
The combination of PulteGroup's Zacks Rank #3 and +4.65% ESP makes us reasonably confident of an earnings beat.
Factors to Consider
One of the nation’s largest and most diversified homebuilders, PulteGroup focuses on managing its homebuilding and financial services businesses. The holding company has brands which include Centex, Del Webb, DiVosta, Pulte Homes, and John Wieland Homes and Neighborhoods.
The company reported better-than-expected earnings in the second quarter of 2016. PulteGroup is likely to do well in the third quarter as well, benefiting from steady demand trends, prudent land investments, focus on higher-return business and gains from the Wieland acquisition. Additionally, lower overhead costs as well as share repurchases will drive earnings as well. The company also expects a conversion rate of between 51% and 54% for the third quarter, compared with the 48% conversion rate a year ago.
As stated in the second-quarter earnings call, PulteGroup’s board approved an incremental $1 billion share repurchase authorization, bringing the total authorization to $1.5 billion. The company expects to utilize it over the next 18 months through repurchases of $250 million in each of the third and fourth quarters of 2016 and an additional $1 billion in 2017.
However, broader housing market headwinds – increasingly competitive environment and cost inflation – and the mild slowdown in sales trends in Texas may hurt the top line in the soon-to-be reported quarter.
Stocks to Consider
Here are some companies in the broader construction sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Louisiana-Pacific Corp. (LPX - Free Report) , with an Earnings ESP of +2.50% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company is slated to release third-quarter 2016 results on Oct 31.
MasTec, Inc. (MTZ - Free Report) , with an Earnings ESP of +4.48% and a Zacks Rank #1. The company will likely release third-quarter 2016 results on Nov 1.
Owens Corning (OC - Free Report) with an Earnings ESP of +1.01% and a Zacks Rank #3. The company will report third-quarter 2016 results on Oct 26.
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