D.R. Horton Inc. (DHI) is set to report fourth-quarter and fiscal 2013 results on Nov 12 before the market opens. Last quarter, the homebuilder delivered a 23.5% positive earnings surprise. Let’s see how things are shaping up for this announcement.
Factors to Consider this Quarter
A sharp increase in interest/mortgage rates slowed order growth in the later half of third quarter. However, volumes returned to the normal seasonal trend in the first three weeks of July. Management believes the slowing sales pace could be temporary and order trends might improve in the fourth quarter as interest rates are still below historical levels and homes are still increasingly affordable. The community count is expected to increase in the range of 15%–20% in the fourth quarter, which could further improve volumes.
Gross margin is expected to be approximately 21% in the fourth quarter of 2013 which represents both a sequential and year-over-year improvement. In the fourth quarter, selling, general and administrative (SG&A) ratio is expected to be around 10% due to stronger home closings and better fixed cost leverage. In the fourth quarter, the backlog conversion rate is expected to be around 70%.
Management expects the company’s profitability to increase in the fourth quarter as well as in 2014. This is expected to be driven by its solid balance sheet and improved liquidity position allowing it to re-invest in growth opportunities; increased pricing power; and rising homes inventory and improving land position.
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 of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Zacks ESP is 0.0%.
Zacks Rank: D.R. Horton’s Zacks Rank #3 (Hold), when combined with 0.0% ESP, makes surprise prediction difficult. We caution against stocks with Zacks Ranks #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
Here are some other companies in the construction sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:
KB Home (KBH), with Earnings ESP of +13.3% and a Zacks Rank #2 (Buy).
Gafisa S.A. (GFA), with Earnings ESP of +72.7% and a Zacks Rank #3 (Hold).
PulteGroup, Inc. (PHM), with Earnings ESP of +2.2% and a Zacks Rank #3 (Hold).