PulteGroup Inc. (PHM - Free Report) is scheduled to report first-quarter 2018 results on Apr 24, before the market opens.
Last quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 1.2%. It surpassed estimates in all of the last four quarters, resulting in an average earnings beat of 4.5%.
Let us take a look at the factors that are likely to influence the company’s Q1 results.
Prudent Land Investments
PulteGroup’s annual land acquisition strategies resulted in improved volumes, revenues and profitability for quite some time now. Its land strategy emphasizes on investing in shorter-lived and smaller land assets, thereby mitigating market risks.
Consistent with its efforts to improve overall asset efficiency and reduce land risks by optioning lots, the company has successfully reduced owned land to just 4.2 years in 2017, down from 5.6 years a year ago. At the same time, it increased lots controlled under option to 37%.
Apart from prudent capital allocation, PulteGroup is taking actions to improve the operating and financial performance. These initiatives include improving overhead leverage, increasing inventory turns and implementing new pricing strategies, which are expected to continue driving meaningful profits in the to-be-reported quarter.
Healthy Housing Momentum to Boost Revenues
Healthy buyer demand along with good traffic points toward strong fourth-quarter revenues for the company. Homebuilders, like PulteGroup, have been doing well lately, courtesy of steady job and wage growth, recovering economy, historically low mortgage rates, rising rentals, rapidly increasing household formation and a limited supply of inventory.
Homebuilding revenues increased 11.9% in 2017, comprising of Home sale and Land sale revenues, both of which increased 11.7% and 58.3%, respectively. Given the strong demand, the trend is likely to continue in the first quarter as well.
The Zacks Consensus Estimate of $1.8 billion for Homebuilding revenues reflects growth of 10.5% from the year-ago quarter. Home sale revenues reflect growth of 12.8% year over year, per the Zacks Consensus Estimate. Land sale revenues will likely increase $12.4 million from the prior-year quarter. On the other hand, consensus estimates for Financial Services revenues of $44.4 million reflect a year-over-year increase of 6.3%.
Overall, for the first quarter, the Zacks Consensus Estimate for total revenues is pegged at $1.84 billion, implying 13.2% growth.
Rising Costs Hurt Margins
Rising land and labor costs are threatening margins by limiting homebuilders’ pricing power. Labor shortages are leading to higher wages while land prices are inflating due to limited availability, thus, denting homebuilders’ margins to some extent. Home sale’s gross margin decreased 140 basis points in 2017. The trend is expected to continue in the to-be-reported quarter.
Overall, given the higher revenue expectation, the bottom-line is expected to increase significantly. The Zacks Consensus Estimate for earnings stand at 44 cents, reflecting a 41.9% increase from the prior-year quarter.
What Does the Zacks Model Unveil?
Our proven model shows that PulteGroup is likely to beat earnings estimates this quarter. 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.
PulteGroup has an Earnings ESP of +4.55% and a Zacks Rank #3, which makes us reasonably confident of an earnings beat. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
PulteGroup, Inc. Price and EPS Surprise
Other Stocks Worth a Look
Here are a few other construction stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.
D.R. Horton, Inc. (DHI - Free Report) has an Earnings ESP of +1.72% and a Zacks Rank #3. The company is set to report quarterly results on Apr 26. You can see the complete list of today’s Zacks #1 Rank stocks here.
Meritage Homes Corp. (MTH - Free Report) has an Earnings ESP of +0.31% and a Zacks Rank #3. The company is about to report quarterly results on Apr 25.
M.D.C. Holdings, Inc. (MDC - Free Report) has an Earnings ESP of +1.89% and boasts a Zacks Rank #2. The company is set to report quarterly results on May 3.
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