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Why Is KB Home (KBH) Up 5.8% Since the Last Earnings Report?

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A month has gone by since the last earnings report for KB Home (KBH - Free Report) . Shares have added about 5.8% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? 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 catalysts.

KB Home Beats Q1 Earnings Estimates, Housing Strong

KB Home reported impressive first-quarter fiscal 2017 earnings of $0.15 per share, surpassing both the Zacks Consensus Estimate and the year-ago profit level of $0.14 by 7.1%.

Total revenue of $818.6 million in the quarter beat the Zacks Consensus Estimate of $802 million by 2.1%. The top line increased 20.7% year over year, driven by higher housing revenues.

Segment Details

Homebuilding Revenue: In the reported quarter, homebuilding revenues grew 20.8% year over year to $816.2 million, driven by a double-digit increase in the number of homes delivered. Land generated $5.3 million in revenues, up 71%. Housing revenues of $810.9 million improved 20.6% from the year-ago quarter.

Net orders rose 13.6% to 2,580 homes, driven by demand growth in the housing markets across the board except the Southeast region. Value of net orders increased 31.6% to $1,085.4 million.

Number of homes delivered jumped 13.9% to 2,224, buoyed by double-digit increases in the company's West Coast, Southwest and Central regions. Average selling price went up 5.9% to $364,600.

At the end of the reported quarter, average community count was 238, down 2.5% year over year.

The company’s backlog totaled 4,776 homes (as of Feb 28, 2017), up 11.5% year over year. Potential housing revenues from backlog increased 25.1% to $1.79 billion, with all the regions registering double-digit gains, barring the Central and Southeast region. This marks the company’s highest backlog value since 2007.

Margins

Adjusted housing gross profit margin (excluding the amortization of previously capitalized interest and inventory-related charges) contracted 80 basis points (bps) to 19.9%.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) were 11.5%, down 160 bps year over year. This marks the lowest first-quarter ratio in the company's history.

Adjusted homebuilding operating margin (after excluding inventory-related charges) increased 50 bps year over year to 3.6%.

Financial Services: In the quarter, Financial Services’ revenues dropped 10.6% year over year to $2.4 million.

Financial Position

KB Home had homebuilding cash, cash equivalents and restricted cash of $351.9 million as of Feb 28, 2017, lower than $592.1 million as of Nov 30, 2016.

Net debt was $2.15 billion as of Feb 28, 2017, compared with $2.05 billion as of Nov 30, 2016, reflecting a net debt-to-capitalization ratio of 55.3%, higher than 54.3% at the end of 2016.

Second-Quarter Guidance

KB Home expects homebuilding revenues between $880 million and $940 million, ASP of around $387,000 to $392,000, and SG&A ratio likely to be about 11.2%.

Homebuilding gross margin will likely be approximately 15.6%, up 50 basis points sequentially. This is mainly driven by improved leverage and fixed cost from increasing quarterly housing revenues, deliveries from recently opened higher margin communities, favorable regional mix, and community-specific gross margin improvement action plans.

It anticipates second-quarter average community count to be flat year over year.

Tax rate for the remaining three quarters of 2017 is expected to be approximately 39%.

Fiscal 2017 Guidance

KB Home increased its homebuilding revenues to the range of $4 billion to $4.3 billion, up from the prior guidance of $3.8 billion and $4.2 billion. ASP is now expected to be around $385,000 to $395,000, up from $370,000 to $385,000, representing an increase of 6%–9%.

The company expects housing gross margin at the 16%–16.5% range, approximately 30 bps below the mid-point of the guided range.

SG&A, as a percentage of sales, is expected to be approximately 10% to 10.4%. Operating margin is projected in the 5.8% to 6.4% band (5.7% to 6.2% earlier). Tax rate will likely be 38.5%. The company expects community count to remain flat in the year.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been five downward revisions for the current quarter. In the past month, the consensus estimate has shifted downward by 12.1% due to these changes.

KB Home Price and Consensus

 

KB Home Price and Consensus | KB Home Quote

VGM Scores

At this time, KB Home's stock has a poor Growth Score of 'F', however its momentum is doing a bit better with a 'C'. However, the stock was allocated a grade of 'B' on the value side, putting it in the top 40% for this investment strategy.

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

Based on our styles scores, the stock is more suitable for value investors than growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. Notably, the stock has a Zacks Rank #1 (Strong Buy). We are expecting an above average return from the stock in the next few months.


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