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Will Lower Sales and Margins Impact NVR in Q1 Earnings?

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NVR, Inc. (NVR - Free Report) is expected to come up with lower earnings and revenues when it reports first-quarter 2019 numbers.

In the last reported quarter, the company’s earnings and revenues surpassed the Zacks Consensus Estimate by 20.9% and 5.7%, respectively. In fact, United Rentals has a strong earnings surprise history. The company’s earnings surpassed expectations in eight of the last 10 quarters.

In the fourth quarter of 2018, its top and bottom lines grew 10% and 103% year over year, respectively, backed by higher homebuilding and mortgage revenues, along with lower tax rate.

NVR, Inc. Price and EPS Surprise

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

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 $33.59, remaining unchanged over the past 60 days. This reflects a decline of 14.6% from the year-ago quarter. The consensus estimate for revenues is pegged at $1.47 billion, down 1.5% year over year.

Factors That Might Influence Upcoming Results

Rising land, labor and material costs are expected to hurt NVR’s first-quarter results. Rising land and labor costs are threatening margins as they limit homebuilders’ pricing power. In 2018, NVR’s gross margin contracted 50 basis points (bps) to 18.7%.

Higher home prices coupled with rising interest rates have impacted affordability and resulted in some moderation of the demand for homes over the past few months. This is evident from NVR’s lower backlog in 2018. As of Dec 31, 2018, backlog (homes sold but not settled) decreased 2% from a year ago to 8,365 units and 4% (on a dollar basis) to $3.2 billion. Moreover, new orders dipped 11% from the prior-year period to 3,841 units in fourth-quarter 2018. Higher cancelation also added to the woes. Fourth-quarter cancellation rate increased to 17% from 14% a year ago. This is likely to affect the company’s top line in the to-be-reported quarter.

The Zacks Consensus Estimate for Homebuilding revenues (accounting for 98% of its total revenues) of $1,452 million reflects a decline from $1,490 million reported a year ago and $1,954 million in the fourth quarter of 2018.

Nonetheless, since the beginning of 2019, the U.S. housing market has been regaining its strength, courtesy of lower mortgage rates and moderating home prices. Also, favorable job market and economic conditions are expected to provide support in mitigating the above-mentioned headwinds.

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 0.00%.

Zacks Rank: It currently carries a Zacks Rank #3.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

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.

Potlatch Corporation (PCH - Free Report) has an Earnings ESP of +45.46% and holds a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Installed Building Products, Inc. (IBP - Free Report) has an Earnings ESP of +3.52% and carries a Zacks Rank #3.

Lennox International, Inc. (LII - Free Report) has an Earnings ESP of +6.21% and a Zacks Rank #3.

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