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Will NVR's Q2 Earnings be Hurt by Rising Land & Labor Costs?

NVR, Inc. NVR is likely to come up with lower year-over-year earnings and revenues when it reports second-quarter 2019 results.

In the last reported quarter, the company’s bottom line topped the Zacks Consensus Estimate by 41.8%. In fact, it has a strong earnings surprise history, having surpassed analysts’ expectations in each of the last five quarters.

First-quarter earnings and revenues grew 21% and 10%, respectively, on a year-over-year basis, backed by strong segmental performance.

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 earnings for the quarter to be reported is pegged at $45.15 per share, remaining unchanged over the past 60 days. This indicates a decline of 8% from the year-ago quarter. The consensus estimate for revenues is pegged at $1.65 billion, down 6% year over year.


NVR, Inc. Price and EPS Surprise


Factors That are Likely to Influence Upcoming Results

Rising land and labor costs have been threatening margins as they limit homebuilders’ pricing power. Labor shortages have been resulting in higher wages. Moreover, land prices have been inflating due to limited availability. Additionally, an increase in import tariff on imported steel and aluminum will escalate raw material cost in the to-be-reported quarter. These headwinds are expected to hurt NVR’s second-quarter results.

Higher home prices have impacted affordability and thereby moderated the demand for homes over the past few months. This is evident from NVR’s lower backlog in first-quarter 2019. As of Mar 31, 2019, backlog (homes sold but not settled) fell 8% on a unit basis and 9% on a dollar basis. This is likely to affect the company’s top line in the to-be-reported quarter.

Nonetheless, NVR’s solid business model and strengthening housing market fundamentals bode well. The company’s sole business is selling and building quality homes by typically acquiring finished building lots, without the risk of owning and developing land in a cyclical industry. These strengths are anticipated to help the company cope with the above-mentioned headwinds to some extent.

Here is What Our Quantitative Model Predicts:

Our proven model shows that NVR is unlikely to beat estimates in the to-be-reported quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to beat the Zacks Consensus Estimate. That is not the case here, as you will see below. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: NVR has an Earnings ESP of -0.21%.

Zacks Rank: It currently carries a Zacks Rank #1.

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.

Stocks to Consider

Here are some 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.

PulteGroup, Inc. PHM has an Earnings ESP of +3.84% and holds a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Meritage Homes Corporation MTH has an Earnings ESP of +5.42% 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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