Is the housing boom about to turn into a housing bummer? Analysts and pundits across the country seem to think so, but don't try telling that to the group tracking homebuilder KB Home (NYSE:KBH). They remain firmly in the optimists' camp on the company, and on tomorrow's earnings news.

Wall Street Wisdom:

  • General consensus. Sixteen analysts follow KB, and the consensus frightens me: It's 10-to-1 buy vs. sell, with five analysts sitting in the middle with holds.
  • Revenues. The consensus of these learned souls is that KB will report 32% growth in quarterly sales tomorrow, to $2.17 billion.
  • Earnings. Earnings are expected to do even better, with analysts calling for 39% growth and $1.96 per share in profits.

Margin watch:
There's no arguing that KB hasn't had a good run so far. Rolling gross margins are up 340 basis points over the past 18 months, most of which have fallen straight to the bottom line, which rose 230 bp over the same timespan. Combined with the expected stellar sales growth, that supports the profits expectations mentioned above.

Margins %

8/04

11/04

2/05

5/05

8/05

11/05

Gross

23.4

24

24.6

25.4

26.2

26.8

Op.

11

11.4

12

12.7

13.7

14.7

Net

6.6

6.8

7.2

7.7

8.3

8.9
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish quiz:
So with analysts loving the company, revenue growth racing ahead, and profitability and profits keeping pace, why is this stock trading at less than seven times trailing earnings? Answer: because housing is cyclical.

Follow-up question: When do you buy cyclical companies? Answer: When they're trading at high P/Es, made so because earnings are depressed so much that they're bound to rebound.

Follow-follow-up question: So when do you sell them? When they're trading at miniscule P/Es, made so because earnings have maxed out and are due for a fall.

Final question: Does that mean now is the time to sell KB? Answer: My hunch is "yes," but the numbers suggest otherwise. While a P/E of 7 looks low to me, the fact of the matter is that over the past decade, KB has traded at a P/E as low as 3, and has traded down to a P/E of 5 in half of those years. Although KB is nowhere near its highest valuation of 16 times earnings -- and so probably should not be bought today -- it's still not as low as it could possibly go.

Want to learn more about cyclical companies? Read all about 'em here.

Competitors:
KB's competitors are well known and include names like DR Horton (NYSE:DHI), Lennar (NYSE:LEN), and Pulte (NYSE:PHM).

Fool contributor Rich Smith does not own shares of any company named above.