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Slower Margin Recovery to Ail D.R. Horton (DHI) Q3 Earnings

D.R. Horton Inc. DHI is scheduled to report third-quarter fiscal 2019 results on Jul 30, before the opening bell. In the last reported quarter, earnings came in at 93 cents per share, surpassing the Zacks Consensus Estimate of 86 cents by 8.1%. D.R. Horton surpassed earnings estimates in two of the last four quarters, with the average positive surprise being 3.5%.

This leading homebuilder’s fiscal second-quarter earnings and revenues increased 2% and 9%, respectively. Factors like declining mortgage rates, moderate home prices, industry-leading market share, broad geographic footprint and affordable product offerings across multiple brands helped D.R. Horton post improved results.

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 to-be-reported quarter is currently pegged at $1.06, remaining unchanged over the past 60 days. This indicates a decrease of 10.2% from the year-ago earnings of $1.18 per share. That said, revenues are expected to be $4.51 billion, suggesting a 2.1% 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 and EPS Surprise

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

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Factors at Play

Although declining mortgage rates and lower housing prices have been driving traffic after a torrid second-half 2018, the conversion of that traffic to sign purchase contracts slowed. Softness in homebuying demand, in response to affordability challenges and general market uncertainty, has been impacting its deliveries, order flow and backlog. These headwinds are expected to affect its fiscal third-quarter results.

That said, since the beginning of calendar year 2019, the U.S. housing market has been regaining strength courtesy of declining mortgage rates and moderating home prices. Favorable job market and economic conditions are expected to provide some support in mitigating the headwinds in the quarter to be reported.

For the fiscal third quarter, the company expects consolidated revenues in the range of $4.4-$4.6 billion (compared with $4.42 billion recorded a year ago) and homes closed within 14,500-15,000 (versus 14,114 units closed in the year-ago period).

Overall, the consensus estimate for Homebuilding revenues (accounting for more than 96.8% of revenues) of $4.33 billion suggests an increase from $4.27 billion recorded a year ago.

Meanwhile, D.R. Horton’s earnings are expected to decline year over year in the fiscal third quarter despite higher revenues, mainly due to increased costs, reduced pricing power, higher incentives on sales activity and the impact of purchase accounting. Rising land/labor and material costs, as well as competitive pricing pressure have been compressing its margins, which will likely impact the upcoming results.

For the fiscal third quarter, the company expects gross margin in the range of 19.3-19.8% (compared with 21.9% in the year-ago period) due to the above-mentioned headwinds. This will result in a lower consolidated pre-tax profit margin in the quarter.

What the Zacks Model Says

Our proven model does not clearly show that D.R. Horton is likely to beat estimates in the quarter to be reported. 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) for this to happen.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: D.R. Horton has an Earnings ESP of +5.54%.

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

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.

KBR, Inc. KBR has an Earnings ESP of +1.16% and holds a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Rayonier Inc. RYN has an Earnings ESP of +19.15% and carries a Zacks Rank #3.

Jacobs Engineering Group Inc. JEC has an Earnings ESP of +1.60% and a Zacks Rank #3.

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Rayonier Inc. (RYN) : Free Stock Analysis Report
 
Jacobs Engineering Group Inc. (JEC) : Free Stock Analysis Report
 
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
 
KBR, Inc. (KBR) : Free Stock Analysis Report
 
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