PulteGroup (PHM) To Report Q2 Earnings: Will It Surprise?

Homebuilding company PulteGroup Inc. (NYSE:PHM) is expected to report second-quarter 2017 results on Jul 25, before the market opens.

Last quarter, PulteGroup delivered a positive earnings surprise of 10.71%. The company also surpassed estimates in each of the trailing four quarters, with an average positive earnings surprise of 9.59%.

Let’s see how things are shaping up for this announcement.

Factors at Play

PulteGroup is well poised to gain traction on the current positive housing scenario. Homebuilders have been doing well courtesy of steady job and wage growth, a recovering economy, historically-low interest/mortgage rates, rising rentals, rapidly increasing household formation, and a limited supply of inventory. All these positive trends point at strong demand in the to-be-reported quarter and 2017 as a whole.

The company has also been experiencing strong buyer demand and good traffic into its communities. PulteGroup is also maximizing the value of its land assets by selling houses at higher prices and better margins, thereby using the resulting strong cash flow to invest in the business, pay off debt and systematically return to shareholders.

All these are likely to help the company in reporting better-than-expected earnings, driven by higher closing volumes and average selling price. Unit closings is anticipated in the range of 4,850–5,050 in the second quarter.

However, rising land and labor costs are threatening margins as they limit homebuilders’ pricing power. Gross margin contracted 230 basis points (bps) year over year to 23.2% in the first quarter of 2017. That said, PulteGroup expects home sales gross margin to increase 30 bps to 60 bps sequentially from first quarter level.

For the second quarter, the Zacks Consensus Estimate for earnings is pegged at 45 cents per share, reflecting an increase of 20.7% year over year, while the consensus for revenues is at $2.03 billion, implying 12.8% year-over-year growth.

Earnings Whispers

Our proven model does not conclusively show that PulteGroup is likely to beat earnings estimates this quarter. 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. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -2.22%. This is because the Most Accurate estimate is 44 cents, while the Zacks Consensus Estimate is pegged at 45 cents.

Zacks Rank: PulteGroup currently carries a Zacks Rank #2. Although a Zacks Rank #2 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

PulteGroup, Inc. Price and EPS Surprise

PulteGroup, Inc. Price and EPS Surprise | PulteGroup, Inc. Quote

Stocks to Consider

Here are a few companies in the construction sector that, according to our model, have the right combination of elements to post an earnings beat this quarter:

Owens Corning (NYSE:OC) has an Earnings ESP of +7.62% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is slated to release its quarterly results on Jul 26.

CalAtlantic Group, Inc. (NYSE:CAA) has an Earnings ESP of +7.69% and a Zacks Rank #3. The company is slated to release its quarterly results on Jul 27.

Louisiana-Pacific Corporation (NYSE:LPX) has an Earnings ESP of +3.28% and a Zacks Rank #2. The company is scheduled to release its quarterly results on Aug 1.

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