PulteGroup Inc. (PHM) is set to report third-quarter fiscal 2014 results on Oct 23, before the market opens. Last quarter, it posted a negative earnings surprise of 3.85%.
The company has missed estimates in the past two quarters. Let’s see how things are shaping up for this announcement.
Factors to Consider This Quarter
Despite strong margins and higher prices, PulteGroup has witnessed lower home deliveries and soft order trends in the past few quarters. We do not expect the trend to reverse in the upcoming quarter.
Due to lack of land development and scarcity of finished lots, Pulte is facing supply constraints in many markets, which in turn is lowering its community count. As such, the homebuilding company has intentionally slowed down sales pace across some of its communities, which in turn lowered its number of homes delivered.
PulteGroup is instead focusing more on driving price and margin in most communities. As a result, gross margins were strong in the first half of 2014 on the back of improved pricing, better mix of sales and the company’s strategic pricing initiatives.
However, this strategy hurt net order growth significantly in 2013 with orders declining around 10%. Orders declined another 4% in the first half of 2014. Though Pulte’s pricing and profits are improving, the below-average order trend remains a concern.
Earnings Whisper?
Our proven model does not conclusively show that PulteGroup is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Negative Zacks ESP: PulteGroup’s Earnings ESP is -5.56% as the Most Accurate Estimate stands at 34 cents while the Zacks Consensus Estimate is higher at 36 cents.
Zacks Rank #4 (Sell): We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Other stocks in the building construction/building materials sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Hovnanian Enterprises Inc. (HOV), with an Earnings ESP of +15.00% and a Zacks Rank #2 (Buy).
United Rentals, Inc. (URI), with an Earnings ESP of +2.46% and a Zacks Rank #3 (Hold).
KB Home (KBH), with an Earnings ESP of +3.92% and a Zacks Rank #3.
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