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KB Home (KBH) Gears Up for Q1 Earnings: What's in the Cards?

Zacks Equity Research

KB Home KBH is slated to report first-quarter fiscal 2019 results on Mar 26, after market close. In the last reported quarter, earnings topped the Zacks Consensus Estimate by 3.2% but revenues lagged the same by 0.02%. In fact, the company surpassed estimates in each of the trailing 12 quarters, with the average positive surprise being 13.8%.

In fiscal fourth-quarter 2018, earnings increased 14% year over year on 4% lower revenues, primarily attributable to lower average selling price (“ASP”) of homes delivered.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release.

For the quarter to be reported, the Zacks Consensus Estimate has been revised downward over the past 60 days to 26 cents per share. This reflects a decrease of 35% from the year-ago earnings of 40 cents per share. Revenues are also expected to decline 4.8% from the prior-year quarter to $829.9 million.

KB Home Price and EPS Surprise

KB Home Price and EPS Surprise | KB Home Quote

Factors at Play

Revenues: The company had a slower start to fiscal 2019, as net orders in the month of December were down 15% year over year. Notably, December is typically KB Home’s slowest selling month. Meanwhile, ongoing housing market headwinds are expected to impact the company in the to-be-reported quarter. It generated unseasonably strong net order activity in the year-ago quarter.

In the fiscal third quarter, the company’s net order value of $738 million was down more than 21%, impacted by a mix shift away from the West Coast and a geographic shift to the lower priced inland markets within this region. As a result, in the fiscal fourth quarter, KB Home’s backlog was down 7% in units and backlog value of $1.4 billion decreased 14% year over year.

For the fiscal first quarter, the company expects housing revenues between $800 million and $860 million (down from $867 million reported in the year-ago period). ASP in the to-be-reported quarter is anticipated within $375,000-$385,000, below the prior-year figure of $389,800. Meanwhile, the Zacks Consensus Estimate for the company’s homebuilding revenues (comprising 99.7% of the total revenues), including housing and land, is pegged at $831 million compared with $1,344 million reported in the fiscal fourth quarter and $869 million in the year-ago period.

Margins: KB Home expects housing gross margin for the fiscal first quarter in the range of 16.6-17.2% (assuming no inventory-related charges), compared with 16.7% a year ago. The company highlighted that the guidance reflects typical seasonal first-quarter decrease in operating leverage owing to lower revenues, partially offset by reduced amortization of capitalized interest. This guidance also reflects the expected impact from the implementation of ASC 606, which will result in the reclassification of certain expenses previously included in construction and land cost to selling, general and administrative (SG&A) expenses.

SG&A expenses, as a percentage of housing revenues, are expected in the range of 12.7-13.5% compared with 11% reported a year ago. This reflects the impact of lower revenues, additional marketing expenses and the ASC 606 reclassification mentioned earlier.

Although KB Home’s Built-to-Order approach and Returns-Focused Growth Plan will provide considerable support to the bottom line, lower revenues and margins, and higher SG&A expenses will have a negative impact on the to-be-reported quarter.

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 #5 (Strong Sell). Note that we caution against stocks with a Zacks Rank #4 (Sell) or 5 going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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.

M.D.C. Holdings, Inc. MDC has an Earnings ESP of +5.03% and a Zacks Rank #3.

Patrick Industries, Inc. PATK has an Earnings ESP of +2.27% and holds a Zacks Rank #3.

Installed Building Products, Inc. IBP has an Earnings ESP of +1.10% and a Zacks Rank #3.

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