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KB Home (KBH - Analyst Report) is set to report fourth quarter and full-year 2013 results on Dec 19. Last quarter, it reported a positive earnings surprise. Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

During the past few quarters, KB Home has shifted its focus from sales growth to margin improvement as orders and revenue growth have been weak for some time.

With the recent improvement in economic conditions and the housing market in general, mortgage rates are edging up toward more normalized levels since May. High interest rates dilute the demand for new homes, as mortgage loans become expensive, thus lowering a buyer’s purchasing power. Accordingly, the sharp increase in interest rates shocked many customers and a few put off their purchase decision, thus increasing cancellation rates and lowering orders for many homebuilders.

In a scenario where home prices are continuously rising, management is emphasizing more on price and margin improvement to optimize returns from its land assets. The reduced focus on sales has also led to lower unit growth in the third quarter.

Despite the rising interest rates, KB Home expects meaningful profits in the fourth quarter on the back of its strategic growth plans and strong housing fundamentals comprising steady demand and constrained supply. However, we believe that order trends will not improve from past levels in the fourth quarter.

Earnings Whispers?

Our proven model does not conclusively show that KB Home is likely to beat earnings this quarter. That is because a stock needs to have both a positive earnings expected surprise prediction or Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP:  KB Home currently has an ESP of -13.33%.

Zacks Rank #3 (Hold): KB Homes’ Zacks Rank #3 (Hold) when combined with a negative ESP makes positive surprise prediction difficult.

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

Other Stocks to Consider

Here are some other construction companies which you may consider, as our model shows they have the right combination of elements to post an earnings beat in the upcoming quarter:

  • Ryland Group Inc. (RYL - Snapshot Report), with Earnings ESP of +6.09% and a Zacks Rank #3 (Hold)
  • PulteGroup, Inc. (PHM - Analyst Report), with Earnings ESP of +10.64% and a Zacks Rank #3 (Hold)
  • MDC Holdings Inc. (MDC - Snapshot Report), with Earnings ESP of +33.87% and a Zacks Rank #3 (Hold)

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