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KB Home Beats Estimates in 3Q12

KBH

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KB Home (KBH - Analyst Report) reported adjusted net loss per share (excluding an income tax benefit) of 10 cents in the third quarter of fiscal 2012, narrower than the Zacks Consensus Estimate of a loss of 17 cents per share.

Double-digit rise in revenues, and increase in average selling price led to the narrower loss in the quarter. The loss was also narrower than the adjusted loss (excluding an income tax benefit) of 13 cents per share in the year-ago quarter.

Total revenue increased 16% over the year-ago quarter to $424.5 million driven by increase in the number of homes delivered and higher average selling price. Total revenue also beat the Zacks Consensus Estimate of $419 million.

Homebuilding Revenue and Income

Housing revenue increased 15.7% over the prior-year quarter to $421.6 million driven by net order growth and pricing gains.

Net orders grew 3% year over year in the third quarter to 1,900 homes. Net order growth was driven by strong performance in the West Coast (up 13%), the Central (up 13%) and Southeast (up 1%) regions, partially offset by a decline in the Southwest region (down 41%).

The value of net orders, however, grew 16% to $493.3 million, significantly higher than the 3% growth in the number of orders, benefiting from average sales price increases. Management is strategically reallocating resources to invest in the preferred markets of the West Coast and Central regions, which have strong growth prospects, thus leading to net order growth.

The number of homes delivered increased 7% over the year-ago quarter to 1,720 homes in the quarter, driven by strong performance in three out of the four homebuilding regions.  A higher backlog at the beginning of the quarter resulted in an increase in the number of homes delivered.

The average selling price rose 8% year over year to $245,100 with the West Coast region recording the maximum price hike of 14%, followed by increase of 13% in Southwest region and 6% in Southeast region. A better product mix comprising increased closings of higher-priced and larger homes drove the sales price higher.

As a percentage of gross orders, the company’s cancellation rate was 29%, higher than 26% in the second quarter of 2012.

The company’s backlog totaled 3,142 homes as of August 31, 2012, up 18% from 2,657 homes as of August 31, 2011. Potential housing revenues from backlog rose 33% to $744.7 million from $559.3 million in the year-ago quarter, primarily on account of increases in backlog revenue in three of the four operating regions.

In the third quarter, the company’s community count declined 13% year over year to 203 communities. The decline was due to the company’s realignment to higher margined submarkets.

Adjusted homebuilding gross margin was 19.0% in the third quarter of 2012 (excluding inventory impairment charges and land option contract abandonment charges), up 180 basis points from the third quarter of 2011. Homebuilding operating income was $10.9 million, significantly up from the comparable prior-year quarter’s income of $1.4 million driven by higher housing gross profits.

Financial Services Revenue and Income

Financial Services revenue (included in total revenue) was $2.95 million, up 6.1% from the prior-year quarter. The pre tax income of the Financial Services business grew 309% to $4.4 million in the third quarter of 2012.

Financial Position

The company had total cash and cash equivalents (including unrestricted cash) of $466.5 million as of August 31, 2012, versus cash and cash equivalents of $377.4 million as of May 31, 2012.

Outlook

With the housing market recovery gaining momentum, KB Home will continue with its strategic initiatives like overhead reduction, margin expansion and increasing backlog and land investments in higher priced, better located communities in order to achieve profitability. The company expects to expand its business across all operating regions by focusing on four initiatives. It is aggressively investing in land assets and communities, activating communities in stabilizing markets, increasing revenues per community, and strengthening management teams with additional resources.

KB Home expects fourth quarter revenue to increase 35% sequentially, owing to higher average selling price and better backlog conversion rate. Average selling prices are expected to jump substantially in the fourth quarter of 2012. The company is expecting to end 2012 with an average selling price of over $240,000. The community count is expected to decline in the fourth quarter and grow thereafter in fiscal 2013.

Our Recommendation

Management is strategically reallocating resources to invest in highly favorable submarkets that allow the company to sell larger, higher priced homes, thus boosting the average selling price and net orders. However, though the housing market is recovering, we believe that the process is erratic, uneven and not yet broad based. We thus believe that KB Home may take time to achieve sustainable profitability.

KB Home carries a Zacks #3 Rank in the near term (Hold rating). We currently have a Neutral recommendation on KB Home.
 

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