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Will Higher Expenses Mar PulteGroup (PHM) Q4 Earnings?

Zacks Equity Research

PulteGroup Inc. PHM is slated to report fourth-quarter 2019 results on Jan 28, before the opening bell.

In the last reported quarter, the company’s earnings and revenues surpassed the Zacks Consensus Estimate by 6.3% and 4.1%, respectively. Moreover, revenues grew 2.3% and earnings remained on par with the year-ago level. Higher demand owing to favorable housing dynamics, backed by lower interest rates and improved affordability, positively impacted its results. However, higher land, labor and material costs and slight change in the product mix put pressure on the bottom line.

Nonetheless, the company surpassed earnings estimates in each of the trailing 12 quarters.

Trend in Estimate Revision

The Zacks Consensus Estimate for the quarter to be reported has been unchanged at $1.08 per share over the past 60 days. The said figure indicates a 2.7% decrease from the year-ago earnings of $1.11 per share. The consensus mark for revenues is $2.97 billion, suggesting 0.9% year-over-year decline.

PulteGroup, Inc. Price and EPS Surprise

PulteGroup, Inc. Price and EPS Surprise

PulteGroup, Inc. price-eps-surprise | PulteGroup, Inc. Quote

Factors at Play

Although declining mortgage rates and decrease in housing prices are expected to have increased traffic in the quarter, lower conversion of that traffic to sign purchase contracts is likely to have weighed on its top line. Resultantly, PulteGroup is expected to have experienced lower revenues and earnings in fourth-quarter 2019.

Also, softness in homes built on a spec basis during the quarter to be reported might have weighed on the top line.

For the fourth quarter, the company expects deliveries within 6,600-6,800 homes. Considering the mid-point of guided range, the estimate indicates a decline from 6,709 reported in the year-ago period. Average selling price or ASP is projected between $425,000 and $430,000. The metric was $430,000 a year ago.

Overall, the Zacks Consensus Estimate for Homebuilding revenues (accounting for nearly 98% of revenues) of $2.9 billion suggests a 1.4% year-over-year decrease. However, it is expected to register 9.8% higher revenues sequentially. Meanwhile, ASP is expected to decline 0.7% year over year to $427,000.

Higher land, labor and material costs are expected to have weighed on fourth-quarter 2019 margins. PulteGroup expects homebuilding gross margin in the fourth quarter within 23.2-23.4%. The metric was 23.8% in the year-ago period and 23.1% in third-quarter 2019.

The company has been witnessing increase in IT spend, operating costs associated with the American West transaction, model home costs and compensation. In a nutshell, lower revenues and margin pressure are expected to have affected its fourth-quarter earnings.

Other Projections

For the quarter to be reported, number of homes closed is likely to grow 0.7% year over year and 9.2% from the last reported quarter to 6,758. Moreover, the consensus estimate for home sale revenues is pegged at $2,888 million, implying a marginal rise from a year ago and 1.1% sequential increase. However, land sale revenues are projected to drop 65% from a year ago to $21 million.

New home orders in fourth-quarter 2019 are expected to be 4,637 units, pointing to 8.7% year-over-year improvement. Backlogs are anticipated to rise 8.7% from the prior-year quarter to 9,479 units. However, the said metrics are likely to decline 23.1% and 18.6% sequentially, respectively.

What the Zacks Model Says

Our proven model does not conclusively predict an earnings beat for PulteGroup this time around. 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. This is not the case here as you will see below.

Earnings ESP: PulteGroup — which shares space with KB Home KBH and Lennar Corporation LEN in the Zacks Building Products - Home Builders industry — has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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

Stock Worth a Look

M.D.C. Holdings, Inc. MDC — which belongs to the same industry — has the right combination of elements to post an earnings beat in their respective quarters to be reported, according to our model. M.D.C. Holdings has an Earnings ESP of +2.42% and carries a Zacks Rank #2.

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