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Lower Selling Price to Hurt KB Home's (KBH) Q2 Earnings

Zacks Equity Research

KB Home KBH is scheduled to report second-quarter fiscal 2019 results on Jun 26, after market close. In the last reported quarter, its earnings surpassed the Zacks Consensus Estimate by 14.8% but revenues missed the same by 2.2%. Notably, the company topped earnings expectations in each of the trailing 13 quarters.

Although the bottom line witnessed a positive surprise trend over the last several quarters, the metric declined 22.5% year over year in the fiscal first quarter. Its top line also decreased 6.9% year over year. The company has been experiencing lower average selling price (“ASP”) of homes delivered, and reduced net orders and backlog value of late.

Which Way are Estimates Trending?

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.

KB Home Price and EPS Surprise

KB Home Price and EPS Surprise

KB Home price-eps-surprise | KB Home Quote

For the quarter to be reported, the Zacks Consensus Estimate has remained unchanged over the past 60 days at 39 cents per share. This indicates a decrease of 31.6% from the year-ago earnings of 57 cents per share. Revenues are also expected to decline 15.1% from the prior-year quarter to $934.75 million.

Factors at Play

Revenues: Post torrid second half of 2018, the overall homebuilding industry has been suffering from lower revenues, order and backlogs. This notable homebuilder had a slower start to fiscal 2019. These headwinds are likely to hamper its performance in the fiscal second quarter as well.

Due to declining order and backlog trend, KB Home expects fiscal second-quarter housing revenues to decline in the range of $900-$950 million from $1,091.8 million reported in the year-ago period. ASP is anticipated within $375,000-$380,000, below the prior-year figure of $401,800.

The Zacks Consensus Estimate for the company’s homebuilding revenues (representing 99.7% of the total revenues), including housing and land, is pegged at $933 million compared with $1,098.7 million reported in the year-ago period.

Margins: Rising labor costs and land prices are likely to threaten KB Home’s margins in the to-be-reported quarter. The company expects fiscal second-quarter housing gross margin in the range of 17-17.6% (assuming no inventory-related charges). Considering the mid-point of the guided range, the metric is marginally higher than the year-ago figure of 17.1%. However, the same suggests a decline of 30 basis points from fiscal first-quarter gross margin of 17.6%, owing to regional and community mix impacts related to expected quarterly deliveries.

SG&A expenses, as a percentage of housing revenues, are expected in the range of 12.3-12.9% compared with 10.4% reported a year ago. This is indicative of the impact of lower revenues, additional marketing expenses, the ASC 606 reclassification, and the absence of legal recoveries and favorable legal settlements.

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, along with higher SG&A expenses will have a negative impact on the to-be-reported quarter.

Homebuilding operating margin (excluding the impact of any inventory-related charges) in the to-be-reported quarter is expected between 4.2% and 5.2% (much lower than 7.3% registered in the prior-year quarter).

What Our Model Indicates

Our proven model does not conclusively show 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 39 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 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.

Acuity Brands, Inc. AYI has an Earnings ESP of +1.82% and a Zacks Rank #3.

Jacobs Engineering Group Inc. JEC has an Earnings ESP of +2.52% and holds a Zacks Rank #3.

Quanex Building Products Corporation NX has an Earnings ESP of +2.78% and a Zacks Rank #1.

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