Yahoo Finance Will D.R. Horton Inc. (DHI) Disappoint this Earnings Season? - Analyst Blog
D.R. Horton Inc. (DHI) is set to report first-quarter fiscal 2015 results on Jan 26, before the market opens.
Last quarter, it posted a negative surprise of 8.16%. D.R. Horton posted negative earnings surprises in two out of the past four quarters with an average negative surprise of 2.77%. Let’s see how things are shaping up for this announcement.
Factors to Consider
With a 29% increase in sales backlog value and 20%+ year-over-year increase in the company’s October orders, D.R. Horton believes it is off to a great start in fiscal 2015. First-quarter gross margin is expected to be within 19.5% to 20%. SG&A ratio is expected to be 11% in the first quarter.
Management is disposing off older inactive inventory to improve inventory turns, cash flow, and the overall return on investment. The company is thus focusing on improving sales pace in many communities across its markets to achieve better return on inventory. In an effort to improve the sales pace, management increased the level of incentives in many communities in the third quarter of fiscal 2014. Though order trends improved in the third and fourth quarters of 2014 with this strategy, it lowered gross margins.
D.R. Horton’s gross margins declined over the past two quarters due to higher incentives and unfavorable mix. Though management believes that incentives have returned to normalized levels and have no plans of using high levels of discounting in the future, unfavorable product and geographic mix are expected to continue to hurt gross margins.
However, the order outperformance in the past few quarters increases our confidence in the stock. The order numbers have been steady for the past few quarters, a trend which is expected to be continued into this quarter.
Earnings Whisper?
Our proven model does not conclusively show that D.R. Horton Inc is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is -2.86% as the Most Accurate estimate stands at 34 cents while the Zacks Consensus Estimate is higher at 35 cents.
Zacks Rank #3 (Hold): Though Zacks Rank #1, 2 or 3 increase the predictive power of ESP, D.R. Horton’s negative ESP of -2.86% makes surprise prediction difficult.
We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Here are some other companies that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Toll Brothers Inc. (TOL) with an Earnings ESP of +6.67% and a Zacks Rank #3 (Hold).
Potlatch Corporation (PCH), with an Earnings ESP of +7.50% and a Zacks Rank #3.
Owens Corning (OC) with an Earnings ESP of +2.38% and a Zacks Rank #2 (Buy).
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TOLL BROTHERS (TOL): Free Stock Analysis Report
D R HORTON INC (DHI): Free Stock Analysis Report
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OWENS CORNING (OC): Free Stock Analysis Report
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