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Low Rates to Aid KB Home (KBH) Q3 Earnings Amid Coronavirus?

KB Home KBH is slated to report third-quarter fiscal 2020 (ended Aug 31, 2020) results on Sep 22, after market close.

In the last reported quarter, its earnings missed the Zacks Consensus Estimate by 3.5%, after surpassing the same in each of the prior 17 quarters. Revenues also missed the consensus mark in the fiscal second quarter by 14.8%. On a year-over-year basis, its bottom line increased while top line declined on lower deliveries and average selling price (ASP).

Trend in Estimate Revision

For the quarter to be reported, the Zacks Consensus Estimate for earnings has increased 4.3% over the past 60 days to 48 cents per share. The estimate indicates a 34.3% decrease from the year-ago earnings of 73 cents per share. The consensus estimate for revenues is pegged at $895.8 million, suggesting a decline of 22.8% from the prior-year quarter.

KB Home Price and EPS Surprise

KB Home Price and EPS Surprise

KB Home price-eps-surprise | KB Home Quote

Factors to Note

Revenues: KB Home — which shares space with Lennar LEN in the Zacks Building Products – Home Builders industry — is expected to have generated lower earnings and revenues in the fiscal third quarter, mainly because of the disruptions caused by the coronavirus outbreak in the United States. Also, shortage of building lots might have impacted sales in the quarter to be reported.

Nonetheless, lower mortgage rates and demand for affordable housing from multiple demographic groups are likely to have given a boost to its order growth. Focus on entry-level buyers and relaxed mortgage lending standards should have also benefited KB Home. This is evident from the company’s pre-released data for June and July order growth on Aug 5. KB Home announced that gross orders collectively grew 14% year over year to 3,275, and net orders were up 17% to 2,682 for the first two months of the fiscal third quarter. The cancellation rate for the period improved to 18% from 20% in the year-earlier period. Its net order growth reflected a year-over-year increase of 11% in June and 23% in July.

Backed by the above-mentioned tailwinds, the Zacks Consensus Estimate for the company’s Homebuilding revenues (representing 99.7% of total revenues) — including housing and land — is pegged at $874 million, which indicates a 24.5% decrease from $1,157 million in the year-ago period. Meanwhile, as stated during fiscal second-quarter earnings call, the company expects third-quarter housing revenues within $820-$880 million.

The Zacks Consensus Estimate for ASP is $394,000, indicating growth of 3.4% from $381,000 reported a year ago. The company expects ASP in the range of $395,000-$400,000.

Financial Services revenues are expected to grow 16.5% year over year for the to-be-reported quarter to $3.28 million.

Orders & Backlogs: The consensus estimate for new orders is currently pegged at 3,990 units, suggesting a 20% year-over-year improvement. Nonetheless, backlogs are expected to be 6,845 units, implying growth of 9.9% from 6,230 units reported in the prior year.

Margins: Rising labor costs and land prices have been major concerns for the overall housing industry. To mitigate these costs and expenses-related headwinds, it undertook various initiatives like the Returns-Focused Growth Plan, Built-to-Order approach, and aggressive investments in land acquisition as well as development. These actions are expected to have provided some support to its margins and bottom-line performance in the to-be-reported quarter.

The company projects housing gross margin within 18.8-19.4% for the third quarter, indicating an increase from 18.5% reported in the year-ago period. SG&A will likely be in the 12.7-13.3% range for the third quarter, suggesting a rise from 11.1% a year ago.

What Our Model Indicates

Our proven model does not conclusively predict an earnings beat for KB Home this time around. It doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

Earnings ESP: Its Earnings ESP is 0.00%. 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 #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks With Favorable Combination

Here are some companies in the broader construction space, 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 +1.67% and a Zacks Rank #1.

Toll Brothers Inc. TOL has an Earnings ESP of +0.16% and holds a Zacks Rank #1.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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