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KB Home (KBH) Up 12.8% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for KB Home (KBH - Free Report) . Shares have added about 12.8% in that time frame, outperforming 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’s Q2 Earnings & Revenues Beat, Margins Up Y/Y

KB Home reported stellar results for second-quarter fiscal 2022 (ended May 31, 2022). Its earnings and revenues beat their respective Zacks Consensus Estimate and increased on a year-over-year basis.

Jeffrey Mezger, chairman, president and chief executive officer, stated, “With our ending backlog of over $6 billion, we are rearming our fiscal 2022 guidance, which we believe we are well positioned to achieve.”

Management noted that sales rates are moderating as buyers face inflationary pressures and the impact of higher mortgage rates. Nonetheless, KBH remains confident about its Built-to-Order business model, enabling it to navigate these changing market conditions.

Earnings & Revenue Discussion

KBH reported adjusted earnings of $2.32 per share, which surpassed the consensus estimate of $1.97 by 17.8%. The metric also rose 55% from the year-ago quarter’s figure of $1.50 per share. The upside was mainly backed by solid revenues and margin growth.

Total revenues of $1.72 billion topped the consensus mark of $1.61 billion by 7.1% and increased 19% on a year-over-year basis.

Segment Details

Homebuilding: The segment's revenues of $1.71 billion increased 19.4% from the prior-year quarter’s levels. The number of homes delivered of 3,469 units was flat from the year-ago levels. The average selling price or ASP increased 21% from a year ago to $494,300.

Net orders dropped 9% from the prior-year quarter to 3,914 homes. Nonetheless, the value of net orders rose 4% from the year-ago quarter to $2.12 billion. The average community count rose 3% from a year ago to 211 and the ending community count increased 7% to 214.

The cancellation rate, as a percentage of gross orders, was 17% compared with 9% a year ago. Quarter-end backlog totaled 12,331 homes, up 23% from a year ago. Further, potential housing revenues from backlog grew 43% from the prior-year period to $6.12 billion. This marks the highest second-quarter level in the company’s history. It is to be noted that the backlog in all the four regions served increased year over year.

Margins

Within homebuilding, housing gross margin improved 390 basis points (bps) year over year to 25.3%. The increase was attributed to a favorable pricing environment due to robust housing demand, the limited supply of available homes for sale and the 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 30 bps from the year-ago figure to 9.8%, thanks to lower external sales commissions and increased operating leverage from higher revenues, partly offset by higher expenses to support growth. Homebuilding operating margin (excluding inventory-related charges) increased 410 bps to 15.4%.

Financial Services revenues rose 7.8% year over year to $5,236 million. Pretax income of $18.7 million, up 75% from a year ago. This reflects significant growth in the equity in income of its mortgage banking joint venture, KBHS Home Loans, LLC, due to an increase in interest rate lock commitments (“IRLCs”).

Financial Position

KB Home had cash and cash equivalents of $244.2 million as of May 31, 2022, down from $290.8 million in the corresponding period of 2021. The company had total liquidity of $925.6 million, including $681.4 million of available capacity under the unsecured revolving credit facility.

Inventories increased 16% to $5.56 billion at the end of the fiscal second quarter. As of fiscal second quarter-end, the debt to capital ratio was 38.8%, up from 35.8% at fiscal 2021-end and 37.7% at fiscal second-quarter 2021 end.

Fiscal 2022 Guidance

For fiscal 2022, the company now expects housing revenues in the range of $7.30-$7.50 billion, narrower than the previous expectation of $7.20-$7.60 billion. ASP is likely to be $500,000. Homebuilding operating margin (assuming no inventory-related charges) is expected to improve 16-16.6%.

Assuming no inventory-related charges, KB Home expects fiscal 2022 housing gross margin in the range of 25.6-26.2%, narrower than the prior expectation of 25.5-26.3%. SG&A expense, as a percentage of housing revenues, is likely to be in the range of 9.3-9.7% (9.2-9.8% projected earlier). It projects an effective tax rate of approximately 25%, assuming no federal energy tax credit extension is enacted. The company expects a year-end community count of 250 in fiscal 2022.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -5.72% due to these changes.

VGM Scores

Currently, KB Home has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, KB Home has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

KB Home is part of the Zacks Building Products - Home Builders industry. Over the past month, Lennar (LEN - Free Report) , a stock from the same industry, has gained 16.1%. The company reported its results for the quarter ended May 2022 more than a month ago.

Lennar reported revenues of $8.36 billion in the last reported quarter, representing a year-over-year change of +30%. EPS of $4.69 for the same period compares with $2.95 a year ago.

For the current quarter, Lennar is expected to post earnings of $4.84 per share, indicating a change of +48% from the year-ago quarter. The Zacks Consensus Estimate has changed +0.6% over the last 30 days.

Lennar has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.


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