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KB Home to Post (KBH) Q3 Earnings: What's in the Cards?

Zacks Equity Research

KB Home KBH is scheduled to report third-quarter fiscal 2019 results on Sep 25, after market close. In the last reported quarter, its earnings and revenues surpassed the Zacks Consensus Estimate by 30.8% and 9.3%, respectively. Notably, the company topped earnings expectations in each of the trailing 14 quarters.

Although the bottom line witnessed a positive surprise trend over the last several quarters, the metric declined 22.5% and 10.5% year over year in the fiscal first and second quarters, respectively. Its top line also decreased 6.9% and 7.2% year over year in the fiscal first and second quarters, respectively. The company has been experiencing lower average selling price (“ASP”) of homes delivered, declining housing revenues and higher marketing expenses to support new community openings.

Which Way are Estimates Trending?

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.

For the quarter to be reported, the Zacks Consensus Estimate for earnings per share has declined 1.5% over the past 60 days to 65 cents. This indicates a decrease of 25.3% from the year-ago earnings of 87 cents per share. Revenues are also expected to decline 4.5% from the prior-year quarter to $1.17 billion.

KB Home Price and EPS Surprise

KB Home Price and EPS Surprise

KB Home price-eps-surprise | KB Home Quote

Factors at Play

Revenues: Although the U.S. market is gradually improving, ongoing housing market headwinds, especially affordability concerns, are still putting up hurdles for KB Home and other homebuilders. Owing to these uncertainties, declining orders and backlog trend, KB Home expects fiscal third-quarter housing revenues to decline in the range of $$1.1-$1.18 billion from $1.22 billion reported in the year-ago period. ASP is anticipated within $395,000-$400,000, indicating a decrease from the prior-year figure of $408,200.

Nonetheless, KB Home expects to boost average community count over the next two quarters. Favorable market dynamics — comprising declining mortgage rates, steady economic growth, high consumer confidence and favorable demographics — will help it grow further.

The Zacks Consensus Estimate for the company’s homebuilding revenues (representing 99.7% of total revenues) — including housing and land — is pegged at $1,167 million, suggesting a decline from $1,222 million reported in the year-ago period.

Margins: Rising labor costs and land prices are likely to threaten KB Home’s margins in the to-be-reported quarter. The company expects fiscal third-quarter housing gross margin in the range of 17.9-18.5% (assuming no inventory-related charges). Considering the mid-point of the guided range, the estimated figure indicates a decrease from the year-ago figure of 23.1%. However, the same suggests an increase of 100 basis points from fiscal second-quarter gross margin of 17.2%.

SG&A expenses, as a percentage of housing revenues, are expected in the range of 11.3-11.9% compared with 9.4% reported a year ago. This is indicative of the impact of lower revenues, additional marketing expenses and the ASC 606 reclassification.

Although KB Home’s Built-to-Order approach and Returns-Focused Growth Plan will provide considerable support to the bottom line, lower revenues and margins, along with higher SG&A expenses will have a negative impact on the to-be-reported quarter.

Homebuilding operating margin (excluding the impact of any inventory-related charges) in the to-be-reported quarter is expected between 6.4% and 7%, implying a significant fall from 9.3% registered in the prior-year period.

What Our Model Indicates

Our proven model does not conclusively show that KB Home is likely to beat estimates in the quarter to be reported. That 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. Unfortunately, that is not the case here, as you will see below.

Earnings ESP: The Earnings ESP for KB Home is -0.38%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: It currently has a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s -0.38% ESP makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.

Note that 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 With Favorable Combination

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.

M.D.C. Holdings, Inc. MDC has an Earnings ESP of +8.95% and a Zacks Rank #1.

PulteGroup, Inc. PHM has an Earnings ESP of +6.96% and holds a Zacks Rank #3.

Masco Corporation MAS has an Earnings ESP of +0.35% and a Zacks Rank #3.

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