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KB Home’s (KBH - Analyst Report) first quarter 2013 adjusted loss (excluding income tax benefit) of 16 cents per share was 30.4% narrower than the Zacks Consensus Estimate of 23 cents loss per share.

The loss was also significantly narrower than the year-ago loss of 51 cents per share riding on higher homebuilding revenues, improved housing gross margin and reduced SG&A ratio.

Total revenue increased 59% from the year-ago quarter to $405.2 million in the first quarter of 2013, driven by higher number of homes closed and hike in average selling prices. Total revenue also beat the Zacks Consensus Estimate of $344 million by 17.8%.

The top line quarterly results benefited from management’s strategy to focus on highly sought-after land constrained housing markets. The company offered larger homes to first time and move up buyers, which helped in raising the average selling prices significantly.

Quarter Details

In the first quarter of 2013, housing revenues increased 59.9% year over year to $402.8 million, largely driven by an increase in selling prices and number of homes delivered.

Financial Services revenues (included in total revenue) were $2.4 million, down 11.1% from the prior-year quarter.

Despite an 11% dip in community count, net orders increased 40% in the quarter to 1,671 homes, driven by double-digit increase in all the regions. The value of net orders grew 83% to $506.8 million, driven by high double-digit increase in net order value in all the regions. Increase in net order value varied across regions, from 41% in Central region to 133% in West Coast regions.

The average selling price rose 24% year over year to $271,300, driven by company’s shift in focus toward first-time and first move-up homebuyers in higher priced communities, where prices are consistently rising. The Southwest region recorded the maximum price hike of 22.4%, followed by an increase of 18.9% in the West Coast region, 16.4% in the Southeast region and 13.2% in the Central region.

The number of homes delivered increased 29% from the year-ago quarter to 1,485 homes, driven by strong performance in West Coast, Southeast and Central homebuilding regions. The number of homes delivered grew 64.7% in the West Coast region, 44.0% in the Southeast region and 17.2% in the Central region.

The company’s backlog totaled 2,763 homes as of Feb 28, 2013, up 25% from 2,203 homes as of Feb 29, 2012. Potential housing revenues from backlog rose 53% to $703.9 million from $460.0 million in the year-ago quarter.

As a percentage of gross orders, the company’s cancellation rate improved 400 basis points year over year to 32% in the first quarter of 2013.

Adjusted homebuilding gross margin improved 420 basis points (bps) in the quarter to 14.8%. Operating margin improved 12.5% year over year driven by higher housing gross profits and SG&A leverage.

The SG&A expense ratio improved 570 bps year over year to 14.7% in the quarter due to the company’s cost reduction initiatives, increases in volumes and average selling prices.

 

Outlook

KB Home believes that the housing recovery is gaining momentum and the company expects profitability for full year 2013.

KB Home maintained its guidance to open more communities in 2013. It hopes to open more than 120 communities in 2013. It expects to grow its community count sequentially in each quarter in 2013. As such, community count is expected to increase 15%. The company expects its land investment to exceed $1 billion for fiscal 2013.

Gross margin is expected to improve sequentially from the second quarter and thereafter improve in the subsequent quarters in fiscal 2013.

KB Home carries a Zacks Rank #3 (Hold).
    
Other stocks in the homebuilding sector that are performing well and deserve a mention include NVR Inc. (NVR - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy), and D. R. Horton Inc. (DHI - Analyst Report) and Hovnanian Enterprises Inc. (HOV - Snapshot Report), carrying a Zacks Rank #2 (Buy).

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