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KB Home (KBH) to Post Higher Q1 Earnings on Solid Demand

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KB Home (KBH - Free Report) is slated to report first-quarter fiscal 2020 results on Mar 26, after market close.

In the last reported quarter, its earnings topped the Zacks Consensus Estimate by 1.6% 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 16 quarters. The bottom line also increased 36% year over year in the fiscal fourth quarter.

Its revenues missed the consensus mark by 2.9% but grew by a notable 15.6% year over year, mainly due to higher home deliveries, partly offset by lower average selling price (ASP) of homes delivered.

Trend in Estimate Revision

For the quarter to be reported, the Zacks Consensus Estimate for earnings has declined 2.3% over the past 30 days to 43 cents per share. That said, the estimate indicates a 38.7% increase from the year-ago earnings of 31 cents per share. The consensus estimate for revenues is pegged at $950.6 million, suggesting a rise of 17.1% from the prior-year quarter.

KB Home Price and EPS Surprise

KB Home Price and EPS Surprise

KB Home price-eps-surprise | KB Home Quote

Factors at Play

Revenues: Although the coronavirus outbreak has created uncertainties for the housing industry and the economy as a whole for the upcoming period, KB Home is expected to have generated higher earnings and revenues in the fiscal first quarter on the back of improved demand, given declining mortgage rates. Although supply-side headwinds in the housing space might have been a cause of concern in the quarter to be reported, solid end-market prospects, growth initiatives and a customer-centric approach should have offset the negatives.

Backed by the above-mentioned tailwinds, KB Home expects fiscal first-quarter housing revenues within $910-$917 million, indicating an increase of 18% from the year-ago period, considering the midpoint of the range. ASP is anticipated to be $375,000, pointing to an increase from $370,900 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 $947 million, which indicates an increase of 17.1% from $809 million in the year-ago period. Within Homebuilding, housing revenues are expected to be $944 million, indicating a 18.3% rise from $798 million reported in the prior-year period. ASP is likely to be $375K, indicating growth from $371K reported a year ago.

Financial Services revenues are expected to grow 14.8% 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 3,210 units, suggesting a 20% year-over-year jump. Backlogs are expected to be 5,800 units, implying growth of 25.2% from 4,631 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.

Assuming no inventory-related charges, the company expects housing gross margin to improve 40 basis points year over year to the range of 17.8-18.2% in the fiscal first quarter.

SG&A expenses — as a percentage of housing revenues — are expected in the range of 12.7-13.1%. The metric in the year-ago quarter was 13.1% (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 4.9% and 5.3% (suggesting an increase from 3.9% a year ago).

What Our Model Indicates

Our proven model predicts an earnings beat for KB Home this time around. That is because a stock has both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Earnings ESP: The Earnings ESP for KB Home is +0.39%. 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. You can see the complete list of today’s Zacks #1 Rank stocks here.

Other Stocks With Favorable Combination

Here are some other 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.

NVR, Inc. (NVR - Free Report) has an Earnings ESP of +7.26% and a Zacks Rank #3.

EMCOR Group, Inc. (EME - Free Report) has an Earnings ESP of +1.55% and holds a Zacks Rank #2.

Mayville Engineering Company, Inc. (MEC - Free Report) has an Earnings ESP of +100.00% and a Zacks Rank #3.

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