Will Higher Housing Demand Aid KB Home's (KBH) Q1 Earnings?

KB Home (NYSE:KBH) is scheduled to report first-quarter fiscal 2018 results on Mar 22, after the closing bell.

One of the top builders in the United States, KB Home delivered a positive earnings surprise of 9.09% last quarter. Also, the company surpassed estimates in each of the trailing four quarters, with an average positive beat of 12.92%.

KB Home is well poised to gain traction on the current positive housing scenario. The momentum is expected to continue in 2018, courtesy of an improving economy, modest wage growth, low unemployment levels and positive consumer confidence. In the last six months, the company’s shares have surged more than 38%, comparing favorably with its industry’s growth of 12.1%.

Let us delve into factors that are also expected to affect KB Home’s performance in the soon-to-be-reported quarter.

Revenues

KB Home’s strategic initiatives that include increasing community count, achieving higher revenues per community, increasing asset efficiency and return on invested capital have been paying off since 2015. These initiatives along with overall positive housing momentum are likely to help KB Home post solid first-quarter results.

KB Home expects homebuilding revenues between $840 million and $880 million in the to-be-reported quarter (compared with $819 million in the year-ago quarter). This is expected to be driven by higher average selling prices and the delivery of a significant portion of the backlog.

Average selling price is anticipated at around $387,000-$392,000, reflecting an increase from $364,600 a year ago. The Zacks Consensus Estimate for average selling price is projected at $391,000 compared with $364,600 in the year-ago period. Average selling price is expected to increase as a result of changing mix of communities, expected proportional mix shift toward the West Coast region, and the successful implementation of targeted community and plan specific price increases.

The company ended the fiscal fourth quarter with a backlog value of $1.66 billion, up 9% from the year-earlier period. Based on the strong backlog value, KB Home is well positioned for continued top-line growth in the first quarter as well as 2018.

Notably, the Zacks Consensus Estimate for total revenues in the fiscal first quarter is pegged at $887.1 million, implying an 8.4% increase.

Margins

KB Home has witnessed margin improvement in 2017. This has been supported by improved leverage on fixed costs from higher quarterly housing revenues, deliveries from higher margin communities, community-specific gross margin improvement action plan and targeted balancing of absorption pace and pricing in its communities.

However, the company expects first-quarter housing gross profit margin in the range of 16-16.5%. This reflects a typical, seasonal first-quarter decrease in operating leverage from lower revenues. Nonetheless, on a year-over-year basis, the guidance reflects a 90-140 bps improvement.

Adjusted operating margin is expected in the range of 4.3-4.7%, compared with 3.6% in the year-ago quarter.

SG&A Ratio

Meanwhile, SG&A ratio will likely be 11.7-12%. SG&A expense ratio is expected to improve 110-140 bps year over year in the first quarter. The ratio improved 50 bps last quarter. This significant improvement reflects benefits from the ongoing cost-control initiatives and the favorable leverage impact of higher housing revenues.

For the fiscal first quarter, the Zacks Consensus Estimate for earnings is pegged at 30 cents. This reflects an increase of 100% from the prior-year quarter owing to higher revenues, increased margins and lower SG&A expenses.

What Our Model Indicates

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 and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Zacks ESP: KB Home has an Earnings ESP of 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 30 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: KB Home has a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes a surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a few companies in the Zacks Construction sector that, according to our model, have the right combination of elements to post an earnings beat this quarter.

Altair Engineering Inc. (NASDAQ:ALTR) has an Earnings ESP of +5.88% and a Zacks Rank #3. The company is slated to report quarterly results on Mar 21.

Lennox International, Inc. (NYSE:LII) has an Earnings ESP of +5.47% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is expected to report quarterly results on April 23.

Potlatch Corporation (NASDAQ:PCH) has an Earnings ESP of +5.11% and a Zacks Rank #1. The company is expected to report quarterly results on April 25.

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