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KB Home (KBH) Q2 Earnings Beat, Revenues Miss, Shares Slide

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KB Home’s (KBH - Free Report) shares dropped 4.3% in the after-market trading session on Jun 23, following second-quarter fiscal 2021 results. Although earnings surpassed the Zacks Consensus Estimate, revenues missed the same. Nonetheless, earnings and revenues grew significantly from a year ago buoyed by strong housing market demand.

Jeffrey Mezger, Chairman, President and Chief Executive Officer said, “With a backlog value above $4 billion, we are poised to deliver a substantial increase in revenue this year, at solid margins that we anticipate will contribute to a return on equity of roughly 20%.”

KB Home Price, Consensus and EPS Surprise

KB Home Price, Consensus and EPS Surprise

KB Home price-consensus-eps-surprise-chart | KB Home Quote

Earnings & Revenue Discussion

KB Home reported quarterly earnings of $1.50 per share, which surpassed the consensus estimate of $1.29 by 16.3%. Also, the metric grew a significant 173% from the year-ago figure of 55 cents per share.

Total revenues of $1,440.9 million missed the consensus mark of $1,475 million by 2.3%. Nonetheless, revenues grew 57.7% on a year-over-year basis.

Segment Details

Homebuilding: For the quarter under review, the segment's revenues of $1,436 million increased 57.8% from the prior-year period.

The number of homes delivered grew 40% from the year-ago level to 3,504 units. Further, average selling price or ASP increased 13% from a year ago to $409,800.

Net orders increased 145% from the prior-year quarter to 4,300 homes, marking the highest second-quarter level in 14 years. Moreover, value of net orders rose 196% from the year-ago quarter to $2.04 billion.

For the reported quarter, average community count was down 17% from a year ago to 205. Quarter-end community count was 200, down 18% from the prior year. Net orders per community averaged 7 per month compared with 2.4 a year ago.

Cancellation rate, as a percentage of gross orders, improved to 9% from 43% reported a year ago. Its quarter-end backlog totaled 10,034 homes (as of May 31, 2021), up 98% from a year ago. Further, potential housing revenues from backlog grew 126% from the prior-year period to $4.29 billion.

Margins

Within homebuilding, housing gross margin (excluding inventory-related charges) improved 280 basis points (bps) year over year to 21.5%. The increase was attributed to a favorable pricing environment due to robust housing market demand, increased operating leverage on higher revenues and lower amortization of previously capitalized interest.

As a percentage of housing revenues, selling, general and administrative expenses improved 250 bps from the year-ago figure to 10.1% due to reduced overhead costs, strong housing demand and increased operating leverage on the back of higher revenues.

Homebuilding operating margin (excluding inventory-related charges) increased 450 bps to 11.4%.

Financial Services revenues rose 31.6% year over year to $4,857 million. Pretax income of $10.6 million was up 40% from a year ago, mainly reflecting higher income from its mortgage banking joint venture, KBHS Home Loans, LLC.

Financial Position

KB Home had cash and cash equivalents of $608.1 million as of May 31, 2021, down from $681.2 million on Nov 30, 2020. The company had total liquidity of $1.4 billion, including $787.6 million of available capacity under the unsecured revolving credit facility.

Inventories increased 10% from Nov 30, 2020 to $4.27 billion at the end of second-quarter fiscal 2021.

Its debt to capital was 37.7% at quarter-end, down from 39.6% as of Nov 30, 2020 (marking an improvement of 190 bps).

Guidance

For the fiscal third quarter, the company expects ASP of $420,000, indicating an increase from $384,700 reported a year ago. Housing revenues will likely be in the range of $1.5-$1.58 billion, indicating an increase from $995.1 million a year ago. Homebuilding operating income margin (excluding the impact of any inventory-related charges) is expected to improve to 11.7-12.1% for the quarter, suggesting an increase from 9.6% a year ago. Assuming no inventory-related charges, KB Home expects a sequential increase in fiscal third-quarter housing gross margin to 21.7% and further improvement in the fourth quarter. SG&A expense ratio will be approximately 9.8%.

For the full year, ASP will likely be in the range of $415,000-$425,000. Housing revenues are expected in the range of $5.9-$6.1 billion. Deliveries are likely to be between 14,000 and 14,500 homes. It expects operating margin (excluding any inventory-related charges) in the range of 11.5-12%. Housing gross margin will likely be within 21.5-22.0%, implying a 215-bps year-over-year increase at the mid-point. SG&A ratio will likely be in the range of 9.8-10.2%.

Zacks Rank

Currently, KB Home carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the Zacks Building Products - Home Builders industry include Lennar Corporation (LEN - Free Report) , Toll Brothers, Inc. (TOL - Free Report) and M.D.C. Holdings, Inc. (MDC - Free Report) , each currently carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Toll Brothers, Lennar and M.D.C Holdings’ earnings for the current year are expected to rise 73.4%, 68.8% and 59.4%, respectively.

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