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Can Positive Housing Market Aid KB Home's (KBH) Q2 Earnings?

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KB Home (KBH - Free Report) is scheduled to report second-quarter fiscal 2018 results on Jun 28, after the closing bell.

One of the top builders in the United States, KB Home delivered a positive earnings surprise of 33.33% in the last reported quarter. Also, the company surpassed estimates in each of the trailing four quarters, with an average positive surprise of 19.46%.

KB Home is well poised to gain traction on the current positive housing scenario. The momentum is expected to continue through the remaining of 2018, courtesy of an improving economy, modest wage growth, low unemployment levels and positive consumer confidence.

Shares of KB Home have gained 5.8% in the past year, outperforming the industry’s 1.2% growth. Meanwhile, earnings estimates for the to-be-reported quarter as well as current fiscal remained stable over the past 30 days.


Let’s delve deeper into the other factors that are expected to affect KB Home’s performance in the soon-to-be-reported quarter.

Revenues

KB Home’s strategic initiatives that include increasing community count, achieving higher revenue per community, as well as increasing asset efficiency and return on capital invested, have been paying off since 2015. These initiatives along with overall positive housing momentum are likely to help KB Home post solid second-quarter results.

KB Home expects housing revenues between $990 million and $1.05 billion in the to-be-reported quarter (versus $995.7 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. The company ended the first quarter with a backlog value of nearly $2 billion, up 10% from the year-earlier period. This marked the highest first order backlog value in over a decade, which is expected to aid in achieving both second-quarter and full-year housing revenue expectations.

Average selling price is anticipated at around $400,000-$405,000, reflecting a year-over-year increase from $385,900 a year ago. This anticipated increase is a result of the changing mix of communities, expected proportional mix shift toward the West Coast region, and successful implementation of targeted community and plan-specific price increases.

Notably, the Zacks Consensus Estimate for second-quarter total revenues is pegged at $1.05 million, implying a 4.9% increase.

Margins

KB Home’s gross margin has notably improved so far this year. This has been supported by improved leverage on fixed costs from higher quarterly housing revenues, deliveries from higher-margin communities, community-specific gross margin improvement action plan, and targeted balancing of absorption pace and pricing in communities.

Due to these factors, the company is expected to generate a significant increase in gross margin in the second quarter as well. The company expects second-quarter housing gross margin (assuming no inventory-related charges) in the range of 16.8-17.2% compared with 16% in the year-ago quarter.

SG&A Ratio

SG&A expense ratio is expected to improve 10.6-11.1% in the second quarter from 10.4% in the second quarter of fiscal 2017. The ratio improved 50 basis points in the last reported quarter. This significant improvement reflects benefits from the ongoing cost-control initiatives and favorable leverage impact of higher housing revenues.

Overall, for the fiscal second quarter, the Zacks Consensus Estimate for earnings is pegged at 49 cents. This reflects an increase of 48.5% year over year, owing to higher revenues, increased margins and lower SG&A expenses.

KB Home Price and EPS Surprise

 

KB Home Price and EPS Surprise | KB Home Quote

What Our Model Indicates

Our proven model does not suggest that KB Home is likely to beat on 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.

Zacks ESP: The Earnings ESP for KB Home is -3.62% as the Most Accurate estimate stands at 48 cents while the Zacks Consensus Estimate is pegged at 49 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 #3 increases the predictive power of ESP.

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 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.

Acuity Brands, Inc. (AYI - Free Report) has an Earnings ESP of +3.87% and a Zacks Rank #3. The company is slated to report quarterly numbers on Jul 3, 2018.

Century Communities, Inc. (CCS - Free Report) has an Earnings ESP of +15.47% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is expected to report quarterly results on Aug 2, 2018.

M.D.C. Holdings, Inc. (MDC - Free Report) has an Earnings ESP of +1.98% and sports a Zacks Rank #1. The company is expected to report quarterly numbers on Aug 7, 2018.

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