It has been about a month since the last earnings report for KB Home (KBH Quick QuoteKBH - Free Report) . Shares have lost about 0.5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is KB Home due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

KB Home (KBH Quick QuoteKBH - Free Report) Q3 Earnings Beat, Margins Up Y/Y, Q4 Views Strong

KB Home reported mixed results in third-quarter fiscal 2022 (ended Aug 31, 2022), with earnings surpassing the Zacks Consensus Estimate and revenues missing the same. On a year-over-year basis, the metrics increased despite prevailing industry headwinds and moderate housing demand.

Jeffrey Mezger, chairman, president and chief executive officer, stated, “Although we experienced a shortfall in deliveries relative to our expectation due to extended build times and ongoing supply chain constraints, which will also impact our 2022 fourth quarter, our results demonstrate our larger scale, excellent portfolio of communities and a healthy balance sheet.”

Mezger added, “While we continue to navigate these uncertain conditions, we believe we are well positioned with our Built-to-Order business model and a signicant backlog of over 10,700 homes, which we expect to deliver over the next three quarters, representing potential future housing revenues of approximately $5.3 billion.”

Earnings & Revenue Discussion

KBH reported adjusted earnings of $2.86 per share, which surpassed the consensus estimate of $2.69 by 6.3%. The metric surged 79% from the year-ago quarter’s figure of $1.60 per share. The upside was mainly backed by strong revenues and margin growth.

Total revenues of $1.845 billion lagged the consensus mark of $1.86 billion by 0.8% but increased 26% on a year-over-year basis.

Segment Details

Homebuilding: The segment's revenues of $1.84 billion increased 25.8% from the prior-year quarter’s levels. The number of homes delivered of 3,615 units was up 5.5% from the year-ago levels. The average selling price, or ASP, increased 19% from a year ago to $508,700.

Net orders declined 50.1% from the prior-year quarter to 2,040 homes, mainly due to lower demand stemming from higher mortgage rates, inflation, and other macroeconomic and geopolitical woes. The value of net orders also fell 51.3% from the year-ago quarter to $979 million. The average community count and the ending community count rose 8% from a year ago to 221 and 227, respectively.

The cancellation rate, as a percentage of gross orders, was 35% compared with 9% a year ago. Quarter-end backlog totaled 10,756 homes, up 0.6% from a year ago figure of 10,694. Further, potential housing revenues from backlog grew 8.6% from the prior-year period to $5.26 billion.
Within homebuilding, housing gross margin (excluding inventory-related charges) improved 500 basis points (bps) year over year to 27%. The increase was attributed to a favorable pricing environment and strong demand for that period.

Selling, general and administrative expenses — as a percentage of housing revenues — improved 100 bps from the year-ago figure to 8.9%, thanks to lower external sales commissions and increased operating leverage. Homebuilding operating margin (excluding inventory-related charges) increased 600 bps to 18.1%.

Financial Services revenues rose 15.4% year over year to $6 million. Pretax income of $4.6 million, down 51.1% from a year ago. This reflects a significant decline in the equity in income of its mortgage banking joint venture, KBHS Home Loans, LLC.

Financial Position

KB Home had cash and cash equivalents of $195.4 million as of Aug 31, 2022, down from $290.8 million at fiscal 2021-end. The company had total liquidity of $928.8 million, including $733.4 million of available capacity under the unsecured revolving credit facility.

Inventories increased 19% to $5.74 billion at the end of the fiscal third quarter. As of fiscal third quarter-end, the debt to capital ratio was 36.8%, up from 35.8% at fiscal 2021-end and 39.6% at fiscal third-quarter 2021 end.

Fiscal Fourth Quarter Guidance

The company expects housing revenues in the range of $1.95-$2.05 billion, up from the year-ago figure of $1.67 billion. ASP is likely to be $503,000. Homebuilding operating margin (assuming no inventory-related charges) is expected to be approximately 16.7%. This compares favorably with the year ago figure of 12.9%.

Assuming no inventory-related charges, KB Home expects housing gross margin in the range of 25-26% versus 22.4% reported a year ago. SG&A expense, as a percentage of housing revenues, is likely to be nearly 8.8% (down from year ago figure of 9.8%). It projects an effective tax rate of approximately 24%. The company expects a quarter-end community count in 235-250 range.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -23.61% due to these changes.

VGM Scores

At this time, KB Home has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise KB Home has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.