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KB Home (KBH - Analyst Report) reported solid first-quarter fiscal 2014 results, surpassing the Zacks Consensus Estimate on both lines due to solid revenues, increase in housing gross profit margin, and better operating leverage. The company’s net order trends improved in the quarter on the back of its strategy of aggressive land investments in the past quarters.

KB Home’s adjusted earnings of 9 cents per share in the first quarter beat the Zacks Consensus Estimate of 8 cents by 12.5% and improved from the year-ago loss of 16 cents per share on the back of a solid top-line increase. The adjusted earnings exclude a gain of $3.2 million on the sale of a joint venture in Maryland.

Total revenue of $450.7 million beat the Zacks Consensus Estimate of $443 million by 1.7%. Revenues increased 11% from the year-ago quarter in the first quarter of fiscal 2014 due to an increase in housing revenues.

Revenues

In the first quarter of fiscal 2014, homebuilding revenues increased 11.3% year over year to $448.3 million driven by increased pricing in all the regions an improved order trends.

The number of homes delivered decreased 2.9% from the year-ago quarter to 1,442 homes due to weak business in the West Coast region.

West Coast homebuilding revenues declined 12% as the region recorded lower backlog at the beginning of the first quarter of fiscal 2014. The rest of the three regions, Southwest, Central and Southeast reported 45%, 18%, and 63% increases in homebuilding revenues, respectively.  

Average selling price (ASP) rose 12% year over year (representing the 15th consecutive quarter hike) to $305,200, driven by a shift in buyer mix to more experienced buyers who prefer larger/more upgraded homes. Strategic community positioning to higher priced communities also pulled up ASPs. The company’s backlog totaled 2,880 homes as of Feb 28, 2014, up 4% year over year.

Potential housing revenues from backlog rose 21% to $851.6 million. At the end of the quarter, the company had 190 active communities, up 10% from the prior-year quarter.

Net orders rose 6% in the quarter to 1,765 homes driven by an increase in community count. The value of net orders increased 18.4% to $600.2 million.

KB Home has been witnessing soft order growth for the past few quarters, due to lack of land and lots. The turnaround in order growth was driven by aggressive land investments made by the company in the past quarters. KB Home has been increased its land acquisition and land development activities from the second half of 2012. The homebuilding company mainly focused on high-end locations, which drove community count and order growth. The company spent $1.14 billion in land investment in fiscal 2013, significantly more than $564.9 million spent in 2012. The company continued its land investments and spent $354.3 million in the first quarter of fiscal 2014.

Adjusted housing gross profit increased 28.3% to $78.5 million in the quarter. Adjusted homebuilding gross margin improved 260 basis points (bps) in the quarter to 17.8%, driven by price increases and a favorable community mix.

The selling, general & administrative (SG&A) expense ratio improved 80 bps year over year to 13.9% in the quarter due to the company’s cost reduction initiatives and increased revenues.

Other Stocks to Consider

KB Home carries a Zacks Rank #3 (Hold). Investors interested in the homebuilding sector can also consider stocks like William Lyon Homes (WLH), Taylor Morrison Home Corporation (TMHC - Snapshot Report) and DR Horton Inc. (DHI - Analyst Report). While William Lyon Homes and Taylor Morrison Home Corp. sport a Zacks Rank #1 (Strong Buy), DR Horton carries a Zacks Rank #2 (Buy).

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