A month has gone by since the last earnings report for KB Home (
KBH Quick Quote KBH - Free Report) . Shares have added about 0.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is KB Home due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
KB Home ( KBH Quick Quote KBH - Free Report) Q2 Earnings Beat, Revenues Miss
KB Home reported second-quarter fiscal 2021 results, wherein earnings surpassed the Zacks Consensus Estimate but 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%.” 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).
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%. How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.96% due to these changes.
Currently, KB Home has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise KB Home has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.