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Homebuilders' Earnings Bear Watching

A number of highfliers will report their quarterly results this week, and one sector that we should note is the domestic housing market.

Single-family housing starts have been well over the 600,000 mark for the last three reported periods (October through December 2013). Some would argue that the winter weather in December weighed somewhat on the industry, but I believe that far more people would agree that the hard winter weather we've experienced in January will have a far greater impact on the housing industry. The combination of snow and below-freezing temperatures will stall housing construction, and we'll see that when the January housing data get reported.

Weather aside, Markit Economics' flash U.S. purchasing managers' index reading was weaker than expected, as were holiday sales, and the combination raises questions about whether we have seen the top in housing. One perspective says that we have not, and that is the month's supply of inventory component on new-home sales. According to the National Association of Home Builders, that figure stood at 4.3 months at the end of November (the most recent month for which the data are available) -- near the lower end of the range for the prior six months.

For the larger overall single-family housing market, which includes both new construction as well as existing homes, inventory levels rose modestly year over year in November -- up to 5.2 months, from 4.9 months in November 2012 -- but a longer view shows that the 5.2 figure is well below six-year levels.

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While the long-term fundamentals for the industry look favorable, as investors we also have to focus on the near term. We must consider the impact the weather will have on homebuilder construction and deliveries, for example, to zero in on entry points or to decide whether homebuilders' shares are fully priced for what lies ahead. Housing stocks had a strong run in 2012, but in 2013, a number of the publicly traded homebuilders -- Toll Brothers (TOL - Get Report), Ryland Group (RYL), KB Homes (KBH - Get Report), D.R. Horton (DHI) and others -- significantly underperformed the S&P 500. So far in 2014, that group of companies has fallen more than the index. That's why I'll be listening to the following this week:

  • D.R. Horton will report its quarterly results on Tuesday, Jan. 28, and the consensus Wall Street expectations call for earnings of $0.29 per share on revenue of $1.45 billion.
  • M/I Homes (MHO) will report its quarterly results on Wednesday, Jan. 29, and the consensus Wall Street expectations are for earnings of $0.55 per share on revenue of $303 million.
  • PulteGroup (PHM - Get Report) will report its quarterly results on Thursday, Jan. 30. Wall Street's expectations call for earnings of $0.44 per share on revenue of $1.68 billion.
  • Also on Thursday, Ryland Group will report its quarterly results, and the consensus Wall Street expectations calls for earnings of $1.13 per share on revenue of $669 million.

Across those companies, the outlook for deliveries will tell the tale for the near term, but pricing and backlog levels (as well as whether or not pricing is better in the backlog than near-term deliveries) will shed some light on earnings in the coming quarters. In addition to the homebuilders, three other companies to watch are closely tied to the industry: the alarm and security companies ADT (ADT - Get Report) and Fortune Brands Home and Security (FBHS) as well as lumber company Weyerhaeuser (WY). When these companies report their results this week, I'll be listening for their expectations regarding demand. Here's what the stock market expects from them:

  • Fortune Brands Home and Security will report after the close on Wednesday, Jan. 29, and expectations call for $0.38 a share on $1.1 billion in revenue.
  • ADT will report its quarterly results on Thursday, Jan. 30, and the consensus Wall Street expectations are for earnings of $0.49 per share on revenue of $850 million.
  • Weyerhaeuser will report its quarterly results on Friday, Jan. 31, and the consensus Wall Street expectations call for earnings of $0.28 per share on revenue of $2.29 billion.

At the time of publication, Versace had no positions in stocks mentioned.
Christopher Versace writes the "PowerTrend Profits" newsletter and "ETF PowerTrader" trading service, which both use a thematic investing perspective that ties in economics, demographics, psychographics, technology and more. He's also the host of PowerTalk, a weekly podcast that features conversations with public and private management teams, as well as other thought leaders, for the benefit of both individual and institutional investors.

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