PulteGroup's (PHM) Q4 Earnings: Is A Beat In The Cards?

PulteGroup Inc. (NYSE:PHM) is scheduled to report fourth-quarter 2017 results on Jan 30, before the market opens.

Last quarter, earnings surpassed the Zacks Consensus Estimate by 1.7%. The company surpassed the Zacks Consensus Estimate in all of the last four quarters, resulting in average earnings beat of 8.1%.

Let us take a look at the factors that are likely to influence the company’s Q4 results.

Healthy Housing Momentum to Boost Revenues

Healthy buyer demand and good traffic point toward a strong fourth quarter revenues for the company. Homebuilders, like PulteGroup have been doing well courtesy of steady job and wage growth, a recovering economy, historically-low mortgage rates, rising rentals, rapidly increasing household formation, and a limited supply of inventory. Though housing industry data were not impressive last December, owing to an extreme cold weather, the industry reported robust gains in October and November. These positive trends point at strong demand in the to-be-reported quarter and beyond.

Apart from positive industry fundamentals, we remain encouraged by PulteGroup’s prudent land investment strategy. The company expects to realize higher returns on invested capital, given the plans to moderate the rate of land spends, increase the use of land options where possible and accelerate inventory turns.

Homebuilding revenues increased 11.7% in the first nine months of 2017. This segment revenue comprise of Home sale and Land sale revenues, both of which increased 11.6% and 78.2% in the first nine months of 2017. The trend is likely to continue in the fourth quarter as well, given the strong demand.

The Zacks Consensus Estimate for Homebuilding revenues of $2.7 billion reflects growth of 30.9% sequentially and 9.4% from the year-ago quarter. The consensus estimate for Home sale revenues reflects growth of 12% year over year but 15.6% decline for Land sale revenues. The Zacks Consensus Estimate for closings stands at 6,547 units (up 5.6%) and that of average selling price is pegged at $415,000.

On the other hand, consensus estimate for Financial Services revenues of $62 million indicates an increase of 32.1% from the prior quarter and 14.8% year over year.

Overall, for the fourth quarter, the Zacks Consensus Estimate for total revenues is pegged at $2.79 billion, implying 11.8% growth.

Rising Costs Hurt Margins

Rising land and labor costs are threatening margins, as they limit homebuilders’ pricing power. Home sales’ gross margin decreased 80 basis points (bps) year over year in the last quarter of 2017. PulteGroup expects gross margin in the lower end of 23.6-24.1% range, implying a decrease of 120 bps to 70 bps for the fourth quarter.

Nonetheless, PulteGroup is taking actions to improve its operating and financial performance. These initiatives include improving overhead leverage, increasing inventory turns and implementing new pricing strategies. The initiatives are expected to drive meaningful profits for PulteGroup in the to-be-reported quarter.

The solid improvement in the top line along with cost reduction program is expected to give a meaningful boost to the company’s earnings. The consensus estimate for earnings stands at 84 cents, reflecting a 25.4% increase from the prior-year quarter.

What Does the Zacks Model Unveil?

Our proven model shows that PulteGroup is likely to beat earnings estimates this quarter. 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.

PulteGroup has an Earnings ESP of +2.01% and a Zacks Rank #2, which makes us reasonably confident of an earnings beat. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

PulteGroup, Inc. Price and EPS Surprise

Other Stocks Worth a Look

Here are a few construction stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.

Potlatch Corporation (NASDAQ:PCH) has an Earnings ESP of +0.43% and boasts a Zacks Rank #1. The company is set to report quarterly results on Jan 29.

D.R. Horton, Inc. (NYSE:DHI) has an Earnings ESP of +4.77% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is set to report quarterly results on Jan 31.

Louisiana-Pacific Corporation (NYSE:LPX) has an Earnings ESP of +6.90% and a Zacks Rank #2. The company is expected to report quarterly results on Feb 2.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>