D.R. Horton, Inc. DHI is set to report fiscal fourth-quarter and full-year 2015 results on Nov 10, before the market opens. Last quarter, the company delivered a positive earnings surprise of 20.00%.
Let’s see how things are shaping up for this announcement.
Factors to Consider
D.R. Horton’s homebuilding revenues and order trends have remained strong in the three quarters of fiscal 2015 reported so far driven by improving housing demand. We expect the trend to continue in the fourth quarter as well.
On the previous earnings conference call, the company announced that the fourth-quarter results will be strong on the back of solid community count, robust backlog position and well stocked inventory of land, lots and homes. Moreover, management stated that sales trends were strong in July as well following the momentum witnessed in the third quarter. The company expects revenues and profits to continue to increase at a double-digit pace. In fact, management is confident that 2016 results could prove to be even stronger.
In the fourth quarter, average selling price is expected to range between $285,000 and $290,000.
However, D.R. Horton’s gross margins have been declining over the past 3–4 quarters due to moderating sales price increase and unfavorable product mix. A higher proportion of lower-priced Express Homes in home closings is unfavorably impacting product mix and thereby denting the gross margins. Management does not foresee any significant improvement in gross margins in the fourth quarter.
Gross margin is expected in the range of high 19% to 20% in the fourth quarter. SG&A ratio is likely to range within 8.7–8.9%, representing a year-over-year improvement of 100–120 basis points.
Earnings Whispers
Our proven model does not conclusively show that D.R. Horton is likely to beat earnings this quarter. That 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. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is 0.00% as the Most Accurate estimate as well as the Zacks Consensus Estimate stand at 62 cents.
Zacks Rank: D.R. Horton’s Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Here are some companies in the broader construction sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
AECOM ACM, with an Earnings ESP of +1.03% and a Zacks Rank #3.
Toll Brothers Inc. TOL, with an Earnings ESP of +6.10% and a Zacks Rank #3.
Summit Materials, Inc. SUM, with an Earnings ESP of +18.75% and a Zacks Rank #3.
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