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KB Home (KBH) Set to Report Q4 Earnings: What to Expect

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KB Home (KBH - Free Report) is slated to report fourth-quarter fiscal 2019 results on Jan 9, after market close.

In the last reported quarter, its earnings topped the Zacks Consensus Estimate by 12.3% on continued progress of the Returns-Focused Growth plan, given stellar average community count growth. Notably, the company's earnings topped analysts’ expectations in each of the trailing 15 quarters.

Despite witnessing a positive surprise trend over the last several quarters, the metric declined 16.1% year over year in the fiscal third quarter. Its top line also decreased 5.3% year over year and missed the consensus mark by 0.8%. The company has been experiencing lower average selling price (“ASP”) of homes delivered.

Trend in Estimate Revision

For the quarter to be reported, the Zacks Consensus Estimate has declined 0.8% over the past 30 days to $1.30 per share. This indicates a 35.4% increase from the year-ago earnings of 96 cents per share. The consensus estimate for revenues is pegged at $1.6 billion, suggesting a rise of 18.5% from the prior-year quarter.

KB Home Price and EPS Surprise

Factors at Play

Revenues: The housing industry has picked up pace on the back of declining mortgage rates, strong economic growth, high consumer confidence and favorable demographics. Although prevailing supply-side headwinds might have remained a cause of concern in the quarter-to-be-reported, solid end-market prospects, growth initiatives and customer-centric approach must have offset the negatives.

Backed by the above-mentioned tailwinds, KB Home expects fiscal fourth-quarter housing revenues within $1.56-$1.64 billion, implying an improvement from $1.34 billion reported in the year-ago period. ASP is anticipated within $400,000-$410,000, pointing to an increase from $395,200 registered a year ago.

The Zacks Consensus Estimate for the company’s Homebuilding revenues (representing 99.7% of total revenues) — including housing and land — is pegged at $1,597 million, which indicates an increase from $1,344 million in the year-ago period. Within Homebuilding, housing revenues are expected to be $1,618 million, indicating a rise from 1,339 reported in the prior-year period. ASP is likely to be $405K, indicating growth from $395K reported a year ago.

Financial Services revenues are expected to grow nearly 20% year over year in the to-be-reported quarter.

Orders & Backlogs: The company’s solid backlog level and new order wins, which are key indicators of significant growth opportunities, bode well. The consensus estimate for new orders is currently pegged at 2,416 units, suggesting 20% year-over-year jump. Backlogs are expected to be approximately 4,652 units, implying growth from 4,108 units reported in the prior year.

Margins: Rising labor costs and land prices have been major concerns for the overall housing industry. To mitigate these costs and expenses-related headwinds, the company undertook various initiatives like Returns-Focused Growth Plan, Built-to-Order approach, and aggressive investments in land acquisition and development. These actions are expected to have provided considerable support to its margins and bottom-line performance in the to-be-reported quarter.

The company expects fiscal fourth-quarter housing gross margin to improve sequentially and on a year-over-year basis to the range of 18.8-19.5%. Considering the mid-point of the guided range, the metric is 45 basis points higher than the year-ago figure of 18.7%.

SG&A expenses — as a percentage of housing revenues — are expected in the range of 8.8-9.2%, implying no change from the year-ago figure of 9% (considering the mid-point of the guided range).

Homebuilding operating margin (excluding the impact of any inventory-related charges) for the to-be-reported quarter is expected between 9.9% and 10.5% (suggesting an increase from 9.7% a year ago).

What Our Model Indicates

Our proven model does not conclusively predict an earnings beat for KB Home this time around. 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 -2.31%. 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 negative ESP makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.

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.

Norbord Inc. (OSB - Free Report) has an Earnings ESP of +166.67% and a Zacks Rank #2.

Louisiana-Pacific Corporation (LPX - Free Report) has an Earnings ESP of +36.36% and holds a Zacks Rank #3.

Weyerhaeuser Company (WY - Free Report) has an Earnings ESP of +14.29% and a Zacks Rank #3.

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