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KB Home's (KBH) Stock Down as Q1 Earnings & Revenues Lag

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KB Home (KBH - Free Report) reported lackluster results for first-quarter fiscal 2022 (ended Feb 28, 2022). Its earnings and revenues missed their respective Zacks Consensus Estimate. During the quarter, the company faced intense supply chain issues and constrained construction labor force, which extended the build times and delayed completions and planned deliveries.

Shares of this leading homebuilder tumbled more than 4.3% in the after-market trading session on Mar 23.

Nonetheless, earnings and revenues impressively on a year-over-year basis on strong housing market demand, driven by a low supply of available inventory and favorable demographics, along with steady employment and wage growth.

Jeffrey Mezger, chairman, president and chief executive officer, stated, “With a backlog value of $5.7 billion and over 10,400 homes in production, a 46% increase relative to the comparable number of homes in production in the prior-year quarter, we are solidly positioned to achieve our financial targets for this year. We believe we will generate meaningful returns-focused growth in 2022, and we are rearming our revenue guidance for the year, with 30% growth to $7.4 billion, and modestly increasing both our operating margin and return on equity expectations to over 16% and 27%, respectively,”

Earnings & Revenue Discussion

KBH’s adjusted earnings came in at $1.47 per share, which lagged the consensus estimate of $1.52 by 3.3%. The metric rose 44% from the year-ago quarter’s figure of $1.02 per share. The upside was mainly backed by solid revenues and margin growth.

KB Home Price, Consensus and EPS Surprise

 

KB Home Price, Consensus and EPS Surprise

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

 

Total revenues of $1.40 billion missed the consensus mark of $1.49 billion by 5.8% but increased 23% on a year-over-year basis.

Segment Details

Homebuilding: The segment's revenues of $1.39 billion increased 22.5% from the prior-year quarter’s levels. The number of homes delivered of 2,868 units was flat from the year-ago levels. The average selling price or ASP increased 22% from a year ago to $486,100.

Net orders dropped 1.9% from the prior-year quarter to 4,210 homes. Nonetheless, the value of net orders rose 15% from the year-ago quarter to $2.15 billion. At quarter-end, the average community count fell 4% from a year ago to 213.

Cancellation rate, as a percentage of gross orders, remained essentially flat at 11% from a year ago. Quarter-end backlog totaled 11,886 homes, up 29% from a year ago. Further, potential housing revenues from backlog grew 55% from the prior-year period to $5.71 billion. This marks the highest first-quarter level since 2007. It is to be noted that backlog in all the four regions served increased year over year.

Margins

Within homebuilding, housing gross margin (excluding inventory-related charges) improved 130 basis points (bps) year over year to 21.1%. The increase was attributed to a favorable pricing environment due to robust housing demand and the limited supply of available homes for sale, and lower amortization of previously capitalized interest. This was partially offset by higher construction costs (especially lumber) and increased expenses to support current operations and expected growth.

Selling, general and administrative expenses — as a percentage of housing revenues — reduced 50 bps from the year-ago figure to 10.2%, thanks to higher operating leverage, given higher revenues.

Homebuilding operating margin (excluding inventory-related charges) increased 220 bps to 12.2%.

Financial Services revenues rose 24.3% year over year to $4,635 million. Pretax income of $8.4 million was flat from a year ago. This reflects higher income from title services and insurance commissions, partly offset by a decrease in the equity in income of its mortgage banking joint venture, KBHS Home Loans, LLC.

Financial Position

KB Home had cash and cash equivalents of $240.7 million as of Feb 28, 2022, down from $290.8 million in the corresponding period of 2021. The company had total liquidity of $1.07 billion, including $831.4 million of available capacity under the unsecured revolving credit facility.

Inventories increased 8% to $5.20 billion at the end of fiscal first quarter. As of fiscal first quarter-end, the debt to capital ratio improved to 38.2%, up from 35.8% at fiscal 2021-end.

Fiscal 2022 Guidance

For fiscal 2022, the company expects housing revenues in the range of $7.20-$7.60 billion. ASP is now expected within $490,000-$500,000 compared with $480,000-$490,000 expected earlier. Homebuilding operating margin (assuming no inventory-related charges) is expected to improve 16-16.6%, up from 15.7-16.5% projected earlier.

Assuming no inventory-related charges, KB Home expects fiscal 2022 housing gross margin in the range of 25.5-26.3%, marginally up from the prior expectation of 25.4-26.2%. SG&A expense, as a percentage of housing revenues, is likely to be in the range of 9.2-9.8% (9.4-9.9% projected earlier). The company expects year-end community count of 255 in fiscal 2022.

Zacks Rank

KB Home currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Key Stocks From the Same Industry

D.R. Horton (DHI - Free Report) currently carries a Zacks Rank #2 (Buy). This Texas-based prime homebuilder continues to gain from industry-leading market share, a solid acquisition strategy, a well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.

D.R. Horton’s earnings are expected to rise 38.5% year over year in fiscal 2022.

Lennar Corporation (LEN - Free Report) currently holds a Zacks Rank #2. This Miami, FL-based homebuilder continues to gain from effective cost control and focus on making its homebuilding platform more efficient, which in turn is resulting in higher operating leverage.

Lennar’s earnings are expected to rise 14.2% year over year in fiscal 2022.

M.D.C. Holdings, Inc. (MDC - Free Report) currently holds a Zacks Rank #2. The company’s build-to-order operating model and focus on more affordable homes have been major driving factors.

M.D.C. Holdings’ earnings are expected to grow 35.5% in 2022.


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