Will KB Home (KBH) Surprise Its Investors In Q2 Earnings?

KB Home (NYSE:KBH) , one of the top builders in the U.S., is scheduled to report second-quarter fiscal 2017 results on Jun 27, after the closing bell.

The homebuilder delivered a positive earnings surprise of 7.14% in the last quarter. Also, the company surpassed estimates in each of the trailing four quarters, resulting in an average positive surprise of 7.30%.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

KB Home’s strategic initiatives, which include increasing community count, achieving higher revenue per community and higher profitability per unit, and increasing asset efficiency and return on capital invested, have started paying off since 2015. Given the overall positive fundamental of the homebuilding industry in recent times, KB Home is expected to witness solid second-quarter performance as well.

KB Home expects homebuilding revenues between $880 million and $940 million for the to-be-reported quarter (against $811.1 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 to be around $387,000–$392,000.

However, the company’s gross margins are under pressure due to higher construction, labor and material costs. Nonetheless, housing gross margin is expected to improve sequentially by about 50 basis points in the second quarter of fiscal 2017 on the back of increasing quarterly housing revenues, deliveries from recently opened higher margin communities, favorable regional mix, and community-specific gross margin improvement action plans.

For the fiscal second quarter, the Zacks Consensus Estimate for earnings is pegged at 26 cents, reflecting an increase of 53.7% year over year. Meanwhile, our estimate for revenues is pegged at $922.1 million, implying a 13.7% increase.

Earnings Whispers

Our proven model does not conclusively show that KB Home is likely to beat on earnings this quarter. This 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. However, that is not the case here as you will see below.

Zacks ESP: KB Home’s Earnings ESP is 0.00% as the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 26 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

KB Home Price and EPS Surprise

KB Home price-eps-surprise | KB Home Quote

Zacks Rank: KB Home’s Zacks Rank #2 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident about an earnings surprise.

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

Stocks to Consider

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

Owens Corning (NYSE:OC) has an Earnings ESP of +11.88% and a Zacks Rank #3. The company is expected to report its quarterly results on Jul 26, 2017.

CalAtlantic Group, Inc. (NYSE:CAA) has an Earnings ESP of +3.85%. This Zacks Rank #3 company is expected to report its quarterly results on Jul 27, 2017. You can see the complete list of today’s Zacks #1 Rank stocks here.

Patrick Industries, Inc. (NASDAQ:PATK) has an Earnings ESP of +0.86% and a Zacks Rank #1. The company is expected to report its quarterly results on Jul 27, 2017.

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