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Can Higher Home Sales Drive PulteGroup (PHM) Q3 Earnings?

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Homebuilding company, PulteGroup Inc. (PHM - Free Report) , is scheduled to report third-quarter 2017 results on Oct 24 before the market opens.

PulteGroup is well poised to gain traction on the current positive housing scenario. Homebuilders have been doing well courtesy of steady job and wage growth, a recovering economy, historically-low mortgage rates, rising rentals, rapidly increasing household formation, and a limited supply of inventory. These positive trends point at strong demand in the to-be-reported quarter and 2017 as a whole.

Homebuilding, comprising about 97.5% of the total revenues, is expected to get a boost in third quarter. The Zacks Consensus Estimate for Homebuilding revenues of $2.3 billion reflect growth of 17.6% sequentially and 22.5% from the year-ago quarter. On the other hand, consensus estimate for Financial Services revenues of $54 million indicates an increase of 14.2% from the prior quarter and 12.5% year over year.

The company has also been experiencing strong buyer demand and good traffic into its communities. PulteGroup is also maximizing the value of its land assets by selling houses at higher prices and better margins, thereby using the resulting strong cash flow to invest in the business, pay off debt and systematically return to shareholders.

All these are likely to help the company in reporting better-than-expected earnings, driven by higher closing volumes and average selling price. The company expects unit closings in the range of 5,400-5,600 in the third quarter.

However, the Zacks Consensus Estimate for net new orders of 5,330 units reflects a decline of 16.7% from the prior quarter but is likely to witness a 11.6% increase year over year.

Again, rising land and labor costs are threatening margins as they limit homebuilders’ pricing power. Home sales gross margin decreased 40 basis points (bps) year over year to 21.1% in the second quarter of 2017. That said, PulteGroup expects gross margin in the range of 23.6-24.1%, implying an increase of 20 bps to 70 bps sequentially for both the third and fourth quarters.

Apart from higher land/labor costs, hurricanes Harvey and Irma are expected to have a negative impact on the company’s results to some extent.

Overall, for the third quarter, the Zacks Consensus Estimate for total revenues is pegged at $2.33 billion, implying 19.8% growth. The solid improvement in the top line is expected to give a meaningful boost to the company’s earnings. The Zacks Consensus Estimate for earnings stands at 59 cents, reflecting a 37.2% year-over-year increase.

Here is what our quantitative model predicts.

PulteGroup does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter

Zacks ESP: The Earnings ESP for PulteGroup is -6.22%.

Zacks Rank: PulteGroup carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of an earnings beat.

PulteGroup, Inc. Price and EPS Surprise

PulteGroup, Inc. Price and EPS Surprise | PulteGroup, Inc. Quote

Stocks Worth a Look

Here are a few construction stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

Masco Corporation (MAS - Free Report) has an Earnings ESP of +0.19% and flaunts a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company is set to report third-quarter results on Oct 24 before the opening bell.

Potlatch Corporation (PCH - Free Report) has an Earnings ESP of +8.26% and boasts a Zacks Rank #1. The company is set to report quarterly results on Oct 23.

Louisiana-Pacific Corporation (LPX - Free Report) has an Earnings ESP of +16.59% and boasts a Zacks Rank #1. The company is set to report third-quarter results on Nov 6.

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