D.R. Horton Inc. (DHI - Free Report) , one of the top builders in the U.S., is scheduled to report third-quarter fiscal 2017 results on Jul 26, before the opening bell.
This homebuilder delivered a positive earnings surprise of 1.69% in the last quarter. Also, the company surpassed estimates in three of the last four quarters, the average positive surprise being 4.03%.
Let’s see how things are shaping up prior to this announcement.
Factors to Consider
Like other homebuilders, D.R. Horton is well poised to gain traction on the current positive housing scenario. Steady job and wage growth, a recovering economy, historically low interest/mortgage rates, rising rentals, rapidly increasing household formation and a limited supply of inventory, point at strong demand in 2017.
As revealed on the second-quarter fiscal 2017 earnings call, D.R. Horton expects its backlog conversion rate in the range of 81–84% in the to-be-reported quarter. This compares favorably with the year-ago level of 78%. Overall, the company’s order trend remained impressive in the last few quarters and is expected to continue in the soon to-be-reported quarter.
Meanwhile, the company anticipates housing gross margin at around 20%, slightly lower than 20.3% recorded a year ago. Further, management has consistently made an effort to reduce both construction and selling, general and administrative (SG&A) expenses. SG&A, as a percentage of sales, is expected to be in the range of 8.6–8.8% in the to-be-reported quarter compared with 8.9% a year ago.
Overall, D.R. Horton continues to maintain a positive outlook with revenues and profits expected to increase in double digits in fiscal 2017.
For the fiscal third quarter, the Zacks Consensus Estimate for earnings is pegged at 75 cents, reflecting a 13.9% year-over-year increase. Meanwhile, the Zacks Consensus Estimate for revenues is pegged at $3.71 billion, implying an 14.8% rise.
Our proven model does not conclusively show that D.R. Horton is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. However, that is not the case here as you will see below.
Zacks ESP: D.R. Horton’s Earnings ESP is 0.00% as the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 75 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: D.R. Horton’s Zacks Rank #1 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.
Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is witnessing negative estimate revisions.
Stocks to Consider
Here are a few companies in the construction sector that, according to our model, have the right combination of elements to post an earnings beat this quarter.
Owens Corning (OC - Free Report) has an Earnings ESP of +4.72% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company is slated to release its quarterly results on Jul 26.
Louisiana-Pacific Corporation (LPX - Free Report) has an Earnings ESP of +3.28% and a Zacks Rank #3. The company is scheduled to release its quarterly results on Aug 1.
KBR, Inc. (KBR - Free Report) has an Earnings ESP of +2.04% and a Zacks Rank #3. The company is slated to release its quarterly results on Aug 1.
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