KB Home (KBH) is set to report third-quarter fiscal 2013 results on Sep 24, before the market opens. Last quarter, it posted a 20% positive surprise. Let’s see how things are shaping up for this announcement.
Factors to Consider This Quarter
KBH management expects to achieve meaningful profits in the second half of fiscal 2013 on the back of its strategic growth plans and strong housing fundamentals comprising steady demand and constrained supply. Its strong land position, significant financial flexibility, increased community count, rising average selling prices (ASPs), solid backlog position and increasing margins and selling, general & administrative leverage are expected to boost profitability. Moreover, ASPs are expected to improve both year over year and sequentially in all the remaining quarters of fiscal 2013.
However, we believe that the negative momentum surrounding the housing industry currently is due to rising interest/mortgage rates. High interest rates dilute the demand for new homes, as mortgage loans becomes expensive thereby lowering a buyer’s purchasing power. This can hurt volumes, revenues and profits of homebuilders. Since May, mortgage/interest rates are edging upward to more normalized levels, raising concern among some analysts.
Moreover, aspate of mixed data releases since late July has created volatility in the homebuilding market.
Our proven model does not conclusively show that KB Home is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Read: Earnings ESP) and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Negative Zacks ESP: The Earnings ESP is -10.00%.
Zacks Rank #3 (Hold): KB Home carries a Zacks Rank #3 (Hold) which lowers the predictive power of ESP because a Zacks Rank #3 (Hold) when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Here are some other housing companies which you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:
Lennar Corporation (LEN), Earnings ESP of +6.52% and a Zacks Rank #3 (Hold).
Hovnanian Enterprises Inc. (HOV), Earnings ESP of +6.25% and a Zacks Rank #3 (Hold).
Taylor Morrison Home Corporation (TMHC), Earnings ESP of +2.63% and a Zacks Rank #3 (Hold).