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KB Home (KBH) to Report Q4 Earnings: What's in the Cards?

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KB Home (KBH - Free Report) is slated to report fourth-quarter fiscal 2018 results on Jan 9, after market close. The company delivered a positive earnings surprise of 11.5% in the last reported quarter.

Moreover, the company surpassed estimates in each of the trailing six quarters, with average positive surprise of 17.6%. Additionally, both its top and bottom lines increased 7.1% and 71%, respectively, on a year-over-year basis.

Let’s See How Things are Shaping Up for This Announcement

KB Home, one of the top home builders in the United States, has been consistently reporting solid top-line numbers across its product categories. The trend is expected to continue in the fourth quarter as well, owing to its Built-to-Order approach and Returns-Focused Growth Plan.

In the first nine months of fiscal 2018, total revenues increased 8% year over year, owing to 4.7% growth in home deliveries and 3% improvement in average selling price. Particularly in the Homebuilding segment, operating income increased 38% to $105.6 million in the said period.

Moreover, for the fiscal fourth quarter, the company expects housing revenues between $1.39 billion and $1.45 billion (versus $1.4 billion reported 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. However, average selling price in the to-be-reported quarter is anticipated to be around $400,000-$405,000, below the prior-year figure of $416,500. Notably, the Zacks Consensus Estimate for fiscal fourth-quarter total revenues is pegged at $1.35 billion, implying a 3.9% decrease from a year ago.

KB Home Price and EPS Surprise

KB Home’s gross margin has notably improved over the past three quarters. The improvement was supported by improved leverage on fixed costs owing to higher quarterly housing revenues, deliveries from higher-margin communities, community-specific gross margin improvement action plan, along with targeted balancing of absorption pace and pricing in communities. However, increase in land, trade labor and material costs continue to partly offset these positives.

Moreover, for the to-be-reported quarter, the company projects housing gross margin within 18.3-18.7%, assuming no inventory-related charges to be incurred in the future. While, gross margin in the fourth quarter of fiscal 2017 was 18.6%.

Also, Homebuilding operating margin (excluding the impact of any inventory-related charges) is expected within 9.3-9.7% for the said quarter.

KB Home invested $1.4 billion in land acquisition and development in the first nine months of 2018, 29% higher than the year-ago level. It remains optimistic that this blend of rising active inventory, while reducing its annual interest incurred, is expected to boost the gross margin and earnings in the quarter to be reported. The Zacks Consensus Estimate for fiscal fourth-quarter earnings is pegged at 93 cents. This reflects a 10.7% year-over-year increase, owing to the above-mentioned factors.

However, material cost inflations are threatening margins as they limit homebuilders’ pricing power. Also, the recently imposed tariff on imported steel and aluminum raises concern. Meanwhile, KB Home’s shares have declined 24.8%, underperforming its industry's decline of 19% over the past six months.

What Our Model Indicates

Our proven model does not suggest 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 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 93 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: KB Home currently has a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s 0.00% 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 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.

D.R. Horton (DHI - Free Report) has an Earnings ESP of +3.61% and a Zacks Rank #3. The company is slated to report quarterly numbers on Jan 25, 2019.

Owens Corning Inc. (OC - Free Report) has an Earnings ESP of +3.13% and holds a Zacks Rank #2. The company is expected to report quarterly results on Feb 20, 2019.

Gates Industrial Corporation PLC (GTES - Free Report) has an Earnings ESP of +6.10% and a Zacks Rank #3. The company is expected to report quarterly numbers on Mar 12, 2019.

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