Will Positive Housing Market Aid KB Home's (KBH) Q4 Earnings?

KB Home (NYSE:KBH) is scheduled to report fourth-quarter fiscal 2017 results on Jan 10, after the closing bell.

One of the top builders in the United States, KB Home delivered a positive earnings surprise of 8.5% last quarter. Also, the company surpassed estimates in each of the trailing four quarters, with an average positive beat of 12.7%.

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, positive consumer confidence and a tight supply situation.

However, fourth-quarter results might be affected to some extent by the disruptions caused by Hurricane Irma, which had hit Florida in the first week of the company’s fourth quarter. As a result, KB Home’s divisions had to be kept closed for about a week. The company experienced a shortfall in net orders in September which is likely to result in a slightly negative net order comparables in the fourth quarter. Orders will likely be down mid-single digits in the quarter. This shortfall equates to 75 and 125 net orders. However, KB Home still anticipates generating a positive net order in value.

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

Revenues

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

KB Home expects homebuilding revenues between $1.3 billion and $1.4 billion in the to-be-reported quarter (against $1.2 billion 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 $425,000-$430,000, reflecting a year-over-year increase of about 10%. Average selling price is expected to increase as a result of the 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 third quarter with a backlog value of $2.1 billion, up 14% from the year-earlier period. The Zacks Consensus Estimate for backlog value is projected at $1.7 billion, compared with $1.5 billion in the year-ago period. Based on the strong backlog value, KB Home is well positioned for continued top-line growth in the fourth quarter as well as 2018.

Notably, the Zacks Consensus Estimate for total revenues in fourth quarter is pegged at $1.4 million, implying a 13.9% increase.

Margins

KB Home has seen a sequential increase in gross margin so far this year. 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.

Due to these factors, the company is expected to generate a meaningful increase in gross margin in the fourth quarter. The company expects fourth-quarter housing gross profit margin in the range of 18% to 18.3%, up 115 basis points (bps) year over year.

SG&A Ratio

SG&A expense ratio is expected to improve 20-40 bps sequentially in the fourth quarter. The ratio improved 120 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 fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 77 cents. This reflects an increase of 91.9% year over year, owing to higher revenues, increased margins and lower SG&A expenses.

KB Home Price and EPS Surprise

What Our Model Indicates

Our proven model shows that KB Home is likely to beat estimates 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. Unfortunately, that is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for KB Home is +1.63% as the Most Accurate estimate stands at 78 cents, while the Zacks Consensus Estimate is pegged at 77 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: KB Home’s Zacks Rank #3 increases the predictive power of ESP.

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.

Other Stocks to Consider

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

Boise Cascade Company (NYSE:BCC) has an Earnings ESP of +23.81% and a Zacks Rank #2.

Owens Corning (NYSE:OC) has an Earnings ESP of +4.02% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Louisiana-Pacific Corporation (NYSE:LPX) has an Earnings ESP of +6.54% and a Zacks Rank #3.

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