Will Margin Woes Impact D.R. Horton's (DHI) Q2 Earnings?

D.R. Horton Inc. (NYSE:DHI) is scheduled to report second-quarter fiscal 2019 results on Apr 25, before the opening bell. In the last reported quarter, earnings of the company came in at 76 cents per share, missing the Zacks Consensus Estimate of 78 cents by 2.6%. D.R. Horton surpassed earnings estimates in two of the last four quarters, with the average positive surprise being 2.9%.

This leading homebuilder not only delivered a negative surprise in the fiscal first quarter, but also its earnings declined 1.3% on a year-over-year basis.

Nonetheless, the company’s total revenues (Homebuilding, Forestar and Financial Services) came in at $3.52 billion, up 5.6% year over year. The reported figure also topped the consensus mark by 1%.

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 86 cents, remaining unchanged over the past 60 days. This indicates a decrease of 5.5% from the year-ago earnings of 91 cents per share. That said, revenues are expected to be $4.03 billion, suggesting a 6.2% year-over-year improvement.

Factors at Play

Concerns surrounding affordability and rising mortgage rates have been plaguing the U.S. housing industry of late. Higher prices of both new and existing homes across most of the markets served by D.R. Horton, coupled with rising interest rates have impacted affordability and resulted in some moderation in the demand for homes in the last few quarters. These ongoing market headwinds are expected to impact the fiscal second quarter as well.

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. Also, favorable job market and economic conditions are expected to provide support in mitigating the headwinds in the quarter to be reported.

For the fiscal second quarter, the company expects consolidated revenues in the range of $3.9-$4.1 billion (compared with $3.79 billion recorded a year ago) and homes closed within 12,800-13,300 (versus 12,281 units closed in the year-ago period).

Overall, the consensus estimate for Homebuilding revenues (accounting for more than 97% of revenues) of $3.83 billion suggests an increase from $3.16 billion recorded a year ago.

Meanwhile, D.R. Horton is expected to come up with lower earnings in second-quarter fiscal 2019 despite higher revenues, mainly due to increased costs, less pricing power, higher incentives on first-quarter sales activity and the impact of purchase accounting. Rising land/labor and material costs, as well as competitive pricing pressure are compressing its margins, which will likely impact the upcoming results.

For the fiscal second quarter, the company expects gross margin in the range of 19-19.5% (compared with 20.8% 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 shows 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 +0.52%.

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

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

Other Stocks Worth a Look

Here are some other 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.

Apergy Corporation (NYSE:APY) has an Earnings ESP of +0.81% and carries a Zacks Rank #1.

The Sherwin-Williams Company (NYSE:SHW) has an Earnings ESP of +2.40% and a Zacks Rank #3.

PotlatchDeltic Corporation (NASDAQ:PCH) has an Earnings ESP of +9.09% and holds a Zacks Rank #2.

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