3 Construction Earnings to Watch on Apr 21, DHI, PHM, SHW
Lennar Corporation LEN and KB Home KBH kick started the first quarter earnings season for the homebuilding industry. Both the companies delivered positive sales and earnings surprises on the back of strong demand and traffic trends in the early spring selling season. The companies also seemed quite optimistic about continued momentum through the rest of the year. Though 2016 started on a shaky note for the construction sector, amid equity market volatility and global concerns, the housing fundamentals seem positive for the rest of the year.
Construction activity is picking up in the ongoing spring selling season. Steady job and wage growth, recovering economy, historically low interest/mortgage rates, moderating home price increases, rising rentals, rapidly increasing household formation and a limited supply of inventory — all point to consistently strong demand in 2016.
Increase in home construction activity not only benefits homebuilders but also spurs demand for homebuilding materials. This, in turn, boosts the growth prospects of companies manufacturing these products.
However, rising building materials and labor costs threaten margins as these limit homebuilders’ pricing power. Also, some markets like Houston are dependent on the oil complex and the volatility in the energy sector is hurting the region’s overall economic growth and in turn, home sales.
Three companies from the construction sector, D.R. Horton Inc. DHI, PulteGroup Inc. PHM and Sherwin-Williams SHW are set to report their quarterly results tomorrow.
D.R. Horton Inc. (DHI)
Texas based homebuilding company, D.R. Horton is set to report second quarter fiscal 2016 results. Last quarter, it posted in line results. The company has an Earnings ESP of -8.51% and a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the quarter is pegged at 47 cents.
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. However, gross margin has remained weak due to higher cost of homes amid moderating sales price increases and unfavorable product mix. For the second quarter of fiscal 2016, gross margin is predicted in the high 19% to 20% range. Moreover, labor bottlenecks and slowing demand trends in the Houston market, witnessed in the past two quarters, is likely to continue in the to-be reported quarter. (Read more: What's in the Cards for D.R. Horton in Q2 Earnings?)
PulteGroup Inc. (PHM)
PulteGroup, an Atlanta-based homebuilding company, posted a positive earnings surprise of 14.00% in its last reported quarter (fourth quarter of 2015). For the first quarter of 2016, the company has an Earnings ESP of 0.00% while it carries a Zacks Rank #3. The Zacks Consensus Estimate for the quarter is pegged at 19 cents.
After weak results in the first three quarters of 2015, the homebuilding company reported better-than-expected results in the fourth quarter. The upside was driven by an improvement in home deliveries, order trends, sales pace, and average selling prices as overall demand trends remained positive. These positives are expected to continue in the soon-to-be reported quarter. However, the industry headwinds – labor constraints and extended land development timelines – are likely to put pressure on results in the first quarter and through the rest of the year. (Read more: What's in Store for PulteGroup this Earnings Season?)
The Sherwin-Williams Company (SHW)
The Sherwin-Williams Company (SHW), an Ohio based coatings and paints company, delivered a positive earnings surprise of 11.58% in the fourth quarter 2015. For the first quarter of 2016, the company has an Earnings ESP of +3.07% while it carries a Zacks Rank #4 (Sell). The Zacks Consensus Estimate for the quarter is pegged at $1.63.
Sherwin-Williams expects consolidated net sales in the first quarter of 2016 to increase by a low single-digit percentage on a year-over-year basis. At this level, the company anticipates earnings in the band of $1.50–$1.65 per share for the first quarter compared with $1.38 earned a year ago. Sherwin-Williams’ aggressive cost control initiatives, working capital reductions, supply chain optimization and productivity improvement should continue to yield margin benefits. However, Sherwin-Williams’ consumer and paint stores businesses continues to be impacted by global economic weakness. Although domestic demand of architectural paint has improved, it remains weak outside North America due to sluggish market conditions and currency headwinds, mainly in Europe and the Latin American countries. Sherwin-Williams’ Latin American operations are also facing soft end-market demand and unfavorable currency translation (stemming from a stronger U.S. dollar). (Read more: Sherwin-Williams: What Awaits this Earnings Season?)
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PULTE GROUP ONC (PHM): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis Report
KB HOME (KBH): Free Stock Analysis Report
D R HORTON INC (DHI): Free Stock Analysis Report
SHERWIN WILLIAM (SHW): Free Stock Analysis Report
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