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KB Home (KBH) Q3 Earnings: Is Disappointment in the Cards?

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KB Home (KBH - Free Report) is scheduled to report third-quarter fiscal 2017 results on Sep 28, after the closing bell.

One of the top builders in the United States, KB Home delivered a positive earnings surprise of 26.92% last quarter. Also, the company surpassed estimates in each of the trailing four quarters, with an average positive beat of 12.47%.

KB Home Price and EPS Surprise

 

KB Home Price and EPS Surprise | KB Home Quote

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

KB Home is well poised to gain traction on the current positive housing scenario. Homebuilders have been doing well, courtesy of steady job growth, a recovering economy, historically low interest/mortgage rates, rising rentals, rapidly increasing household formation, and a limited supply of inventory. All these positive trends point at strong demand in the to-be-reported quarter and the whole of 2017.

Precisely, KB Home’s strategic initiatives, which include increasing community count, achieving higher revenue per community and higher profitability per unit, and increasing asset efficiency and return on capital invested, have started paying off since 2015. These initiatives along with overall positive housing momentum is likely to aid KB Home to witness solid third-quarter performance as well.

KB Home expects homebuilding revenues between $1.08 billion and $1.15 billion for the to-be-reported quarter (against $910.1 million in the year-ago quarter). This is expected to be driven by higher average selling prices and the delivery of a significant portion of the backlog. Average selling price is anticipated to be around $405,000-$410,000, reflecting 11% to 12% year-over-year growth.

However, the company’s gross margins are under pressure due to higher construction, labor and material costs. Nonetheless, homebuilding gross margin is expected to be between 16.4% and 16.7% in the quarter against 15.5% in the year-ago quarter.

For the fiscal third quarter, the Zacks Consensus Estimate for earnings is pegged at 47 cents, reflecting an increase of 12.2% year over year. Meanwhile, our estimate for revenues is pegged at $1.13 million, implying a 23.3% increase.

What Our Model Indicates

Our proven model does not conclusively show that KB Home is likely to beat estimates this quarter. 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.

Zacks ESP: The Earnings ESP for KB Home is -4.51%, because the Most Accurate estimate stands at 45 cents, while the Zacks Consensus Estimate is pegged at 47 cents. You can uncover the best stocks to buy or sell before they’re reported with our  Earnings ESP Filter.

Zacks Rank: KB Home’s Zacks Rank #2 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

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 to Consider

Here are a few companies in the Construction sector that, according to our model, have the right combination of elements to post an earnings beat this quarter.

Louisiana-Pacific Corporation (LPX - Free Report) has an Earnings ESP of +15.79% and a Zacks Rank #3. The company is expected to report quarterly results on Oct 30, 2017.

Owens Corning (OC - Free Report) has an Earnings ESP of +2.54%. This Zacks Rank #1 company is expected to report quarterly results on Oct 25, 2017. You can see the complete list of today’s Zacks #1 Rank stocks here.

MasTec, Inc. (MTZ - Free Report) has an Earnings ESP of +1.12% and a Zacks Rank #1. The company is expected to report quarterly results on Nov 2, 2017.

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