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Can PulteGroup (PHM) Top Q2 Earnings Despite Margin Woes?

Zacks Equity Research

PulteGroup Inc. PHM is slated to report second-quarter 2019 results on Jul 23, before the opening bell. In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 25.5%. Notably, it surpassed estimates in each of the trailing 10 quarters.

First-quarter 2019 earnings were in line with the year-ago figure. Revenues increased 1.4% on a year-over-year basis.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release.

The Zacks Consensus Estimate for the quarter to be reported is currently pegged at 82 cents per share, remaining unchanged over the past 30 days. This indicates a decrease of 7.9% from the year-ago reported figure of 89 cents per share. Revenues are expected to be $2.47 billion, down 3.7% year over year.

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

PulteGroup is expected to come up with lower revenues and earnings in second-quarter 2019, mainly due to the ongoing U.S. housing market uncertainties. Although declining mortgage rates and lower housing prices have been driving traffic after a torrid second-half 2018, the conversion of that traffic to sign purchase contracts slowed. Softness in homebuying demand, in response to affordability challenges and general market uncertainty, has been impacting its deliveries, order flow and backlog. These headwinds are expected to impact results in the to-be-reported quarter.

For the to-be-reported quarter, the company expects deliveries within 5,400-5,700 homes versus 5,741 in the year-ago period. Average selling price or ASP is projected between $430,000 and $435,000 versus $427,000 a year ago.

Overall, the consensus estimate for Homebuilding revenues (accounting for 98% of revenues) of $2.42 billion suggests a decrease from $2.52 billion recorded a year ago. However, it is expected to register 24% higher revenues sequentially.

In addition to affordability woes, higher construction material prices, and rising land and labor costs are pressing concerns. PulteGroup expects homebuilding gross margin in the second quarter within 22.8-23.3% (compared with 24% in the year-ago period).

The second quarter is expected to experience reduced overhead leverage owing to lower expected closings. SG&A is expected in the range of 11-11.5% of home sale revenues.

In a nutshell, lower revenues and margins are expected to affect the company’s second-quarter results.

PulteGroup, Inc. Price and EPS Surprise

PulteGroup, Inc. Price and EPS Surprise

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

What the Zacks Model Says

Our proven model shows that PulteGroup is likely to beat estimates in the quarter to be reported. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to deliver a positive surprise. This is exactly the case here, as you will see below.

Earnings ESP: PulteGroup has an Earnings ESP of +3.84%. This is because the Most Accurate Estimate of 85 cents per share is pegged higher than the Zacks Consensus Estimate of 82 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: PulteGroup carries a Zacks Rank #3, which further increases the predictive power of ESP. The positive ESP and its favorable rank make us reasonably confident about an earnings beat this reporting cycle. You can see the complete list of today’s Zacks #1 Rank stocks here.

Note that 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.

Other Stocks Worth a Look

Here are some other companies in the Zacks Construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarters to be reported.

Arcosa, Inc. ACA has an Earnings ESP of +15.22% and holds a Zacks Rank #2.

Rayonier Inc. RYN has an Earnings ESP of +19.15% and carries a Zacks Rank #3.

M.D.C. Holdings, Inc. MDC has an Earnings ESP of +3.96% and a Zacks Rank #1.

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