Will D.R. Horton (DHI) Surprise Earnings Estimates in Q2? - Analyst Blog

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D.R. Horton Inc.DHI is set to report second-quarter fiscal 2015 results on Apr 22, before the market opens.

Last quarter, it posted a positive surprise of 11.43%. D.R. Horton posted two negative earnings surprises in the past four quarters, with average negative surprise of 4.92%. Let's see how things are shaping up for this announcement.

Factors to Consider

At the first quarter of fiscal 2015 conference held in January, D.R. Horton commented that January sales and traffic were up sequentially, increasing optimism for the spring selling season. Management expects overall housing demand to improve further with the upbeat economy and job growth.

The company believes that it is well positioned to meet housing demand in the spring selling season, backed by solid community count and well stocked inventory of land, lots and homes.

Order outperformance in the past few quarters increases our confidence in the stock. The order numbers have been steady for the past few quarters, a trend which is expected to continue in the soon-to-be reported quarter.

Home sales gross margin is expected to range between 19.5% and 20%, D.R. Horton's gross margin declined over the past three quarters due to higher incentives and unfavorable mix. Though management believes that incentives have returned to normalized levels and it has no plans of using high levels of discounting in the future, unfavorable product and geographic mix are expected to continue to hurt gross margin.

Homebuilding SG&A in the second quarter is expected to be in the range of 10.6% to 10.8% of revenues, which is an improvement of 30 to 50 basis points.

Earnings Whisper?

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 ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: Earnings ESP is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 39 cents.

Zacks Rank: D.R. Horton holds a Zacks Rank #2 (Buy). Though Zacks Rank #1, 2 or 3 increase the predictive power of ESP, D.R. Horton's 0.00% ESP makes surprise prediction difficult.

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

Stocks to Consider

Here are some other companies in the broader 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:

Toll Brothers Inc. TOL with an Earnings ESP of +8.57% and a Zacks Rank #1 (Strong Buy).

Chicago Bridge & Iron Company N.V. CBI , with an Earnings ESP of +5.26% and a Zacks Rank #3 (Hold).

CEMEX, S.A.B. de C.V. CX with an Earnings ESP of +45.46% and a Zacks Rank #2.

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D R HORTON INC (DHI): Free Stock Analysis Report

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TOLL BROTHERS (TOL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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