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Will Q1 Earnings be a Treat for These 4 Homebuilding Stocks?

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The Q1 earnings season is gathering steam and investors are eagerly awaiting results from major homebuilders, which have remained in the spotlight throughout the quarter for a number of reasons. The quarter witnessed massive volatility on uncertainty over the number of interest rate hikes and inconsistent monthly homebuilding data.

Evidently, the S&P Homebuilders Select Industry Index has dropped 8.8% year to date. Again, the Zacks Homebuilding Industry has declined 1% so far this year, comparing unfavorably with the broader market’s (S&P 500) return of 3.8%.

Indeed, the U.S. stock market seems to have taken a brief hiatus. That said, positive momentum at the start of the first-quarter reporting cycle remains intact for the industry given the solid earnings outlook and favorable economic fundamentals.

Homebuilding at a Glance

Sales of previously-owned homes jumped in February, marking the first gain in the last three months. This shows that an increasing number of Americans are looking to buy homes despite rising prices and limited availability.

As revealed by the National Association of Realtors (NAR), existing-home sales ticked up 3% in February to a seasonally adjusted annual rate of 5.54 million units from 5.38 million in January. Sales increased 1.1% from the year-ago level. The surge in existing-home sales (accounting for 90% of the market), after the slump in the last two months, indicates that competition is expected to heat up in the traditional spring home-buying season.

Meanwhile, new home sales increased 0.5% year over year in February but dropped 0.6% from the prior month to a seasonally adjusted annual rate of 622,000 units. Building permits, though down 5.7% month over month, rose 6.5% year over year in February.

Rising mortgage rates and high prices of homes from inventory squeeze are indeed a bottleneck for buyers (mostly first-time). Apart from concerns over possibilities of a series of rate hikes by the Federal Reserve, homebuilders continue to grapple with growing labor shortage, limited land availability, higher material costs and a constrained mortgage environment. These are keeping homebuilders from responding to growing demand.

That said, the homebuilders’ confidence reading for March was a solid 70 buoyed by growing demand. In spite of inventory shortage, robust demand from a solid economy and a cheerful job market are making the industry go strong. With the strong economic fundamentals in place, the overall homebuilding picture is pretty encouraging for 2018.

Solid Q1 Earnings Expectations

Majority of the Zacks broad sectors (14 out of 16) are expected to be in the positive territory in the first quarter of 2018. Notably, homebuilding companies are broadly grouped in the Construction sector (one of the 16 Zacks sectors) and companies seem to be on solid ground.  Per the latest Earnings Preview, construction sector earnings are expected to increase 35.4% in the first quarter compared with 20.6% in the preceding quarter. Revenues are expected to rise 15.8% (13.3% growth in Q4), while margins are likely to grow 1% (0.4% in Q4).

In spite of the inventory woes and higher costs, it is a profitable strategy to zero in on a handful of housing stocks that are poised to beat earnings this quarter. An earnings beat would also pave the way for stock price appreciation.

Notable Q1 Releases So Far

A close look at the recently-released numbers of the nation’s homebuilding bigwigs unveils an encouraging picture. KB Home (KBH - Free Report) came up with stellar first-quarter fiscal 2018 results on solid fundamentals. Earnings surpassed the Zacks Consensus Estimate by 33.3% and surged 116.7% from the year-ago quarter. Though revenues missed the consensus mark, it increased 6% year over year, driven by higher housing revenues.

Lennar Corporation (LEN - Free Report) posted better-than-expected earnings and sales on solid demand. Notably, the company completed the CalAtlantic buyout in February. Stuart Miller, Chief Executive Officer of Lennar, said, "Our first quarter results begin to display the true power of this combination.  Although these results do not include 2 ½ months of CalAtlantic's operations, all company metrics have performed as expected or better and we have grown more confident in our ability to exceed our $100 million synergy target in 2018 and we are on track to meet our $365 million synergy target in 2019."

Which Are the Right Picks?

Picking the right stocks could be a daunting task given the wide range of companies in the housing space. One way to do it is by choosing stocks that have the combination of a favorable Zacks Rank — #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and positive Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Winning Stocks

For investors ready to try out this strategy, we have highlighted four homebuilding stocks that may stand out this season.

Our first choice is PulteGroup Inc. (PHM - Free Report) . The company primarily engages in homebuilding and financial services businesses in the United States. This leading national homebuilder topped earnings estimates in each of the trailing four quarters, the average beat being 4.51%. It also seems to be poised to beat expectations in the to-be-reported quarter. The company carries a Zacks Rank #3 and has an Earnings ESP of +4.55%. The Zacks Consensus Estimate for earnings is pegged at 44 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

PulteGroup is scheduled to report first-quarter of fiscal 2018 results on Apr 24, before the market opens.

We have chosen Meritage Homes Corporation (MTH - Free Report) that designs and builds single-family homes in the United States. The company topped earnings estimates in each of the last four quarters with an average beat of 20.22%. It looks poised to beat expectations in the first quarter as well. The company carries a Zacks Rank #3 and has an Earnings ESP of +31%. The Zacks Consensus Estimate for earnings stands at 74 cents.

Meritage Homes is slated to report fourth-quarter results on Apr 25, after the closing bell.

D.R. Horton, Inc. (DHI - Free Report) , a leading Texas-based national homebuilder, makes another attractive pick. The company has surpassed earnings estimates in the trailing four quarters, the average beat being 5.83%. The company is poised to beat expectations in the to-be-reported quarter as well. It carries a Zacks Rank #3 and has an Earnings ESP of +1.72%. The Zacks Consensus Estimate for earnings is pinned at 86 cents. You can see the complete list of today’s Zacks #1 Rank stocks here.

D.R. Horton is scheduled to report second-quarter of fiscal 2018 results on Apr 26, before market opens.

The fourth option is a Denver, CO-based homebuilder M.D.C. Holdings, Inc. (MDC - Free Report) that engages in homebuilding and financial service businesses in the United States. Last quarter, the company delivered a negative earnings surprise of 9.23%. Nonetheless, the company has surpassed estimates in three of the trailing four quarters, the average positive earnings surprise being 29.24%.

For the upcoming release, M.D.C. Holdings has a Zacks Rank #3 along with an Earnings ESP +1.89%. The Zacks Consensus Estimate for first quarter earnings is 53 cents.

M.D.C. Holdings will likely announce first-quarter 2018 results on May 3, before the opening bell.

Bottom Line

Taking the recovering economy and solid job market into consideration, one should ideally snap up housing stocks before they release their earnings numbers.

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