Factors Likely to Shape D.R. Horton's (DHI) Q2 Earnings

D.R. Horton Inc. DHI is scheduled to report second-quarter fiscal 2020 results (ended Mar 31, 2020) on Apr 28, before the opening bell.

In the last reported quarter, the company’s earnings and revenues beat the Zacks Consensus Estimate by 7.6% and 6.5%, respectively. Earnings and revenues of this homebuilding company also grew 30.3% and 14.3%, respectively, from the year-ago reported figures, courtesy of its industry-leading market share, broad geographic footprint and affordable product offerings across multiple brands.

Markedly, D.R. Horton reported better-than-expected earnings in all the last four quarters, with the average surprise being 10.7%.

Trend in Estimate Revision

The Zacks Consensus Estimate for the to-be-reported quarter’s earnings has been unchanged at $1.12 per share over the past 30 days. This indicates a 20.4% increase from the year-ago earnings of 93 cents per share. The consensus mark for revenues is $4.52 billion, suggesting a 10.4% year-over-year improvement.

D.R. Horton, Inc. Price and EPS Surprise

D.R. Horton, Inc. Price and EPS Surprise

D.R. Horton, Inc. price-eps-surprise | D.R. Horton, Inc. Quote

Factors to Consider

Factors like favorable mortgage rates, moderate home prices, industry-leading market share, broad geographic footprint and affordable product offerings across multiple brands are expected to have aided D.R. Horton to generate higher revenues mostly throughout the second quarter of fiscal 2020.

However, widespread slowdown in economic activity owing to the coronavirus outbreak began to affect the company’s business operations and demand for homes in the latter part of March, stretching into April. Cancellation rate in March was 24% compared with 18% a year ago.

Earlier in the month, D.R. Horton announced preliminary results for the second quarter of fiscal 2020, wherein it reported solid sales, net orders and backlog numbers. Additionally, it reported select preliminary results for March 2020 amid the coronavirus pandemic.

Preliminary Q2 Highlights: Home sales revenues in the fiscal second quarter increased 10% to $4.4 billion from $4 billion a year ago. Homes closed grew 8% to 14,539 homes and 10% in value to $4.4 billion in the quarter.

Net sales orders increased 20% to 20,087 homes and 22% in value to $6 billion. It registered double-digit percentage growth in each geographic region served except Southeast, which recorded 7% net sales order growth. Cancellations were 4,570 homes in the quarter compared with 3,896 homes a year ago. Cancellation rate was 19% in both the periods.

The company's sales order backlog of homes under contract, as of Mar 31, 2020, advanced 14% on a year-over-year basis to 19,328 homes and 18% in value to $5.9 billion.

March Highlights: Owing to coronavirus-induced shutdowns, cancellation rate in March was 24%, increasing from 18% a year ago. Nonetheless, gross sales orders in the month grew 14% to 8,511 homes from 7,495 homes in March 2019. Net sales orders in the month increased 6% to 6,491 homes from 6,127 homes in March 2019 and the value of net sales orders grew 5% to $1.9 billion from $1.8 billion.

Despite higher revenue expectation, D.R. Horton’s earnings are likely to have been affected by gross margin woes. Increased costs, reduced pricing power, and the impact of purchase accounting, warranty and litigation might have had a negative impact on fiscal second-quarter gross margins. Again, rising land/labor and material costs, as well as competitive pricing pressure — which have been causes of concern for homebuilders over the last few quarters — are likely to have impacted the company’s gross margin.

What the Zacks Model Says

Our proven model does not conclusively predict an earnings beat for D.R. Horton this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here, as you will see below.

Earnings ESP: D.R. Horton has an Earnings ESP of -0.83%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: It currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks Worth a Look

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.

Masco Corporation MAS has an Earnings ESP of +10.73% and carries a Zacks Rank #3.

Rayonier Inc. RYN has an Earnings ESP of +5.00% and holds a Zacks Rank #3.

Installed Building Products, Inc. IBP has an Earnings ESP of +4.62% and holds a Zacks Rank #3.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.  

Click here for the 6 trades >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Rayonier Inc. (RYN) : Free Stock Analysis Report
 
Masco Corporation (MAS) : Free Stock Analysis Report
 
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
 
Installed Building Products, Inc. (IBP) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research