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NVR to Post Q4 Earnings: What's in Store for the Stock?

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NVR, Inc. (NVR - Free Report) is expected to report fourth-quarter 2018 results on Jan 24. The nation’s largest homebuilding and mortgage banking company surpassed the Zacks Consensus Estimate for both earnings and revenues in the last reported quarter.

On a year-over-year basis, its top and bottom lines grew 11% and 27%, respectively, in the last reported quarter, backed by overall segmental growth and lower tax rate.

NVR, Inc. Price and EPS Surprise

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported is pegged at $48.46, having declined 1.8% over the past 30 days. However, this reflects a gain of 11.6% from the year-ago quarter.

The consensus estimate for revenues is pegged at $1.85 billion, up 3.8% year over year.

Let’s See How Things are Shaping Up for This Announcement

Strong business model, solid backlog and positive housing market fundamentals will drive NVR’s growth in the to-be-reported quarter. The company has been consistently reporting solid top-line numbers across its segments.

In fact, total revenues (Homebuilding & Mortgage Banking fees combined) in the first nine months of 2018 grew 15.1% on a year-over-year basis. Specifically, Homebuilding revenues (accounting for 98% of the total revenues) increased 15% year over year, given 17% increase in the number of settled units. Notably, new orders increased 9%, backed by continued favorable market conditions that led to higher community absorption rates. The trend is expected to continue in the fourth quarter as well, owing to robust demand for homes, favorable job market and economic conditions.

Importantly, NVR’s solid backlog level and positive housing market fundamentals are likely to remain tailwinds in the soon-to-be-reported quarter. As of Sep 30, 2018, its backlog increased 10% year over year to 9,710 units. The upside was primarily attributable to 24% higher backlog unit balance.

However, rising land, labor and material costs are threatening NVR’s margins, as these limit homebuilders’ pricing power. Limited availability of land and labor is leading to higher wages and inflated land prices. Moreover, the recently imposed tariff on imported steel and aluminum is a pressing concern.

In the first nine months of 2018, gross margin contracted 40 basis points to 18.8% due to higher lot and material costs, along with a high impairment charge. SG&A expenses grew 9%, primarily due to an increase in equity-based compensation.

Meanwhile, shares of NVR have lost 31.9% in the past year, comparing favorably with its industry’s decline of 33.5%.

Here is What Our Quantitative Model Predicts:

Our proven model shows that NVR is unlikely to beat estimates in the to-be-reported 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) to beat the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: NVR has an Earnings ESP of -8.52%.

Zacks Rank: It currently carries a Zacks Rank #4 (Sell).

We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks to Consider

Here are some companies in the Zacks Construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarters to be reported.

Taylor Morrison Home Corporation (TMHC - Free Report) has an Earnings ESP of +25.00% and a Zacks Rank #3. The company is expected to report quarterly results on Feb 6.

Meritage Homes Corporation (MTH - Free Report) has an Earnings ESP of +1.08% and carries a Zacks Rank #3. The company is scheduled to report quarterly results on Jan 30.

Owens Corning (OC - Free Report) has an Earnings ESP of +1.05% and a Zacks Rank #3. The company is likely to report quarterly numbers on Feb 20.

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