D.R. Horton's (DHI) Q2 Earnings: Is a Beat in the Cards?

D.R. Horton Inc. DHI is scheduled to report second-quarter fiscal 2018 results on Apr 26, before the opening bell.

In the last reported quarter, the homebuilder delivered a positive earnings surprise of 20.31%. The company surpassed/met the Zacks Consensus Estimate for earnings in three of the trailing four quarters, with the average beat being 5.83%.

Like other homebuilders, D.R. Horton is well poised to gain traction on the current positive housing scenario. Steady job and wage growth, a recovering economy, rising rentals, rapidly increasing household formation and a limited supply of inventory point toward strong demand in 2018.

Resultantly, shares of D.R. Horton, one of the top builders in the United States, have increased more than 32% in the past year, outperforming the industry’s 17.9% rally.

D.R. Horton, Inc. Price and EPS Surprise

 

D.R. Horton, Inc. Price and EPS Surprise | D.R. Horton, Inc. Quote

Let’s See How Things are Shaping Up for This Announcement

With an impressive sales backlog, along with a well-stocked supply of land, lots and homes, D.R. Horton is well positioned for 2018. The company expects its backlog conversion rate for the second quarter to be in the range of 97-100%.

The company’s homebuilding revenues increased 14% year over year in the preceding quarter. For the to-be-reported quarter, the Zacks Consensus Estimate for Homebuilding revenues (comprising about 98% of total revenues) of $3,695 million indicates an increase from $3,252 million in the last quarter and $3,164 million in the year-ago period.

Net sales orders increased 16% to 10,753 homes on continued improvement in the preceding quarter. For the upcoming release, the consensus estimate for net sales orders of 15,779 units reflects an increase from 13,991 units a year ago and 10,753 units in the prior quarter.

Last quarter, home closings increased 15% to 10,788 homes, while growing 14% to $3.2 billion in value. Per the Zacks Consensus Estimate, home closings are estimated to be 12,089 units compared with 10,685 units a year ago.

On the other hand, the consensus estimate for Financial Services revenues of $93 million indicates an increase from $81 million in the prior quarter and $87 million a year ago.

Overall, the Zacks Consensus Estimate for total revenues stands at $3.75 billion, implying 15.3% year-over-year growth.

Apart from solid revenues, D.R. Horton expects home sales gross margin to be around 20-21%, compared with 19.8% in the year-ago quarter. In the preceding quarter, the company’s gross margin on home sales expanded 100 basis points (bps) year over year to 20.8%. The upside was driven by lower warranty, litigation and interest costs as a percentage of homebuilding revenues.

However, investors should note that the company’s home sales gross margin decreased 20 bps to 20% in fiscal 2017. Rising labor costs are threatening margins of noted homebuilders like D.R. Horton, Lennar Corp. LEN, KB Home KBH, PulteGroup Inc. PHM and Toll Brothers, Inc. TOL among others.

Meanwhile, for SG&A (selling, general and administrative) expenses, as a percentage of homebuilding revenues, the company expects it to be in the range of 9-9.2%. This compares favorably with the year-ago level of 9.3%.

Overall, D.R. Horton remains well poised to gain traction on the current positive housing scenario.  For the fiscal second quarter, the Zacks Consensus Estimate for earnings is pegged at 86 cents per share, reflecting a solid increase of 43.3% year over year.

Here is what our quantitative model predicts:

D.R. Horton has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: D.R. Horton has an Earnings ESP of +3.67%.

Zacks Rank: D.R. Horton carries a Zacks Rank #3, which increases the predictive power of ESP. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

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