Toll Brothers, Hovnanian Upcoming Q3 Margins Eyed By MKM Partners

Two big housing construction companies report earnings next week and investors will be looking for improved growth in orders as well as at least a little wider profit margins, an analyst said Friday.

MKM Partners' Megan McGrath is concerned that discounting reported by D.R. Horton DHI earlier this month could spread within the industry and hurt margins.

"We'll be listening for any commentary on more aggressive pricing," McGrath said in a note Friday.

High-end home-maker Toll Brothers TOL is slated to post Wednesday, while the larger and more diverse Hovnanian Enterprises HOV comes out the following day.

Hovnanian offered wide discounts in March and early April. Although management said it wasn't planning to extend the program, "we'll be watching to see if some discounted sales flowed into the third quarter," said McGrath, who predicts flat third-quarter margins for Hovnanian.

McGrath rates Hovnanian Neutral with a $4 target. She's more comfortable with Toll Brothers, maintaining a Buy and $43 target.

Toll should should see "decent margin upside" in the third quarter, "which should allay some fears of aggressive industry pricing," McGrath said.

Homebuilder stock prices generally fell this summer amid investor fears of a stall in the housing recovery. Despite this, McGrath expects easy comparisons with a slower 2013 will result in order growth for Hovnanian of eifght percent and six percent for Toll.

Wall Street expects Hovnanian to post third-quarter earnings of $0.09 a share on revenue of $559.5 million. Toll is expected to report earnings of $0.45 on revenue of $986.9 million.