What's In The Cards For D.R. Horton's (DHI) Q3 Earnings?

D.R. Horton Inc. (NYSE:DHI) is scheduled to reportits third quarter of fiscal 2016 results on Jul 21, before the opening bell.

Last quarter, it had delivered a positive earnings surprise of 10.64%.

The company surpassed estimates in three out of the past four quarters, resulting in an average positive surprise of 8.47%.

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

Factors to Consider

D.R. Horton expects to deliver a strong performance in the third and fourth quarter of fiscal 2016 on the back of its robust backlog position and well-stocked inventory of land, lots and homes.

D.R. Horton’s order trends have been steady for the past few quarters, a trend which is expected to continue in the soon-to-be reported quarter.

After weak numbers in the first quarter, home closings increased 12% in the second. We expect the improved trend to continue in the third quarter, which coupled with continued pricing gains should result in higher home sales.

Gross margins have remained weak due to higher costs -- mainly labor -- and an unfavorable product mix. A higher proportion of Express Homes in home closings are unfavorably impacting the product mix and thereby gross margins. We do not expect any significant gross margin improvement in the third quarter. For the third quarter of fiscal 2016, management has projected gross margin in the high 19% to 20% range.

Selling, general and administrative expenses (SG&A) expenses have been going down on better fixed cost leverage as revenues increase. The improvement is anticipated to continue which should help profits. SG&A ratio is expected to be in a range of 8.9% to 9.1% in the third quarter.

Earnings Whisper

Our proven model does not conclusively show that D.R. Horton is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. However, that is not the case here as you will see below.

Negative Zacks ESP: D.R. Horton’s Earnings ESP is -1.52% as the Most Accurate Estimate stands at 65 cents while the Zacks Consensus Estimate is pegged higher at 66 cents.

Zacks Rank: D.R. Horton’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

Note that we caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the broader construction sector that can be considered as our proven model shows that they have the right combination of elements to post an earnings beat this quarter:

CalAtlantic Group, Inc. (NYSE:CAA) with an Earnings ESP of +9.21% and a Zacks Rank #2.

Louisiana-Pacific Corp. (NYSE:LPX) , with an Earnings ESP of +4.00% and a Zacks Rank #1.

Owens Corning (NYSE:OC) , with an Earnings ESP of +9.41% and a Zacks Rank #1.