NVR To Report Q2 Earnings: Will The Stock Surprise Again?

Homebuilding company NVR, Inc. (NYSE:NVR) is expected to report second-quarter 2017 results on Jul 21, before the market opens.

Last quarter, NVR delivered a positive earnings surprise of 27.25%. The company also surpassed estimates in two of the last four quarters, with an average positive earnings surprise of 3.70%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Much like other homebuilders, NVR too is well poised to gain traction on the current positive housing scenario. Steady job and wage growth, a recovering economy, historically-low interest/mortgage rates, rising rentals, rapidly increasing household formation, and a limited supply of inventory, point at strong demand in 2017.

The positive momentum continued in the first quarter of 2017 with the company reporting 11% year-over-year increase in Homebuilding revenues. The trend is expected to continue in the to-be-reported quarter, as is evident from its solid backlog. As of Mar 31, 2017, backlog of homes sold-but-not-settled increased on a unit basis by 9% to 8,052 homes and on a dollar basis by 13% to $3.19 billion from Mar 31, 2016. Overall, NVR is poised to gain traction in 2017 on the current positive housing scenario.

However, rising land and labor costs are threatening margins as they limit homebuilders’ pricing power. Although gross margin expanded 30 basis points (bps) year over year in the first quarter of 2017, it remained flat sequentially. Notably, gross margin in 2016 was down 120 bps due to higher construction and selling-related costs year over year.

For the second quarter, the Zacks Consensus Estimate for earnings is pegged at $28.63, reflecting a 30.1% year-over-year increase. Meanwhile, our estimate for revenues is pegged at $1.56 billion, implying a rise of 14.4%.

Earnings Whispers

Our proven model does not conclusively show that NVR is likely to beat earnings estimates this 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) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.47%. This is because the Most Accurate estimate is $28.21, while the Zacks Consensus Estimate is pegged at $28.63.

Zacks Rank: NVR currently carries a Zacks Rank #1. Although a Zacks Rank #1 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

NVR, Inc. Price and EPS Surprise

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

Stocks to Consider

Here are a few companies in the construction sector that, according to our model, have the right combination of elements to post an earnings beat this quarter:

Owens Corning (NYSE:OC) has an Earnings ESP of +10.78% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is slated to release its quarterly results on Jul 26.

Lennox International Inc. (NYSE:LII) has an Earnings ESP of +0.73% and a Zacks Rank #2. The company is scheduled to release its quarterly results on Jul 24.

CalAtlantic Group, Inc. (NYSE:CAA) has an Earnings ESP of +7.69% and a Zacks Rank #3. The company is slated to release its quarterly results on Jul 27.

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