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KB Home (KBH) Q3 Earnings & Revenues Top, Orders Rise 52% Y/Y

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KB Home (KBH - Free Report) reported better-than-expected results in third-quarter fiscal 2023 (ended Aug 31, 2023). Both the earnings and revenues beat the Zacks Consensus Estimate. With this, the company’s earnings and revenues surpassed the consensus mark in three consecutive quarters.

Shares of this leading homebuilder lost 0.7% during the trading session and 2% in the after-market trading session on Sep 20.

Pertaining to the quarterly results, Jeffrey Mezger, chairman, president and chief executive officer, stated, “Demand was steady throughout the quarter, leading to a community absorption pace of 4.3 net orders per month, even though mortgage interest rates rose as the quarter progressed. With the choice, flexibility and affordability that our Built to Order model offers to our buyers, we believe we are well positioned to navigate the potential for shifting housing market conditions.”

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

KBH reported adjusted earnings per share (EPS) of $1.80, which topped the consensus estimate of $1.38 by 30.4%. In the year-ago period, the company reported EPS of $2.86.

Total revenues of $1.59 billion also beat the consensus mark of $1.46 billion by 8.9% and decreased 14% on a year-over-year basis.

Segment Details

Homebuilding: The segment's revenues of $1.58 billion decreased 14.1% from the prior-year quarter’s levels. The number of homes delivered was 3,375 units, down 7% from the year-ago period’s levels. However, the average selling price, or ASP, declined 8.3% from a year ago to $466,300.

The most notable observation in the quarter was order growth rate. Net orders grew 52% to 3,097 units from the prior year. The value of net orders was up 54% from the year-ago quarter to $1.51 billion, depicting improved demand conditions and a lower cancelation rate compared with the year-ago period. Monthly net orders per community increased to 4.3 from 3.1, and were above the company’s historical third-quarter average, prior to pandemic-driven volatility.

The cancelation rate, as a percentage of gross orders, was 21% compared with 35% in the year-ago period. In the prior quarter, it was 22%.

Quarter-end backlog totaled 7,008 homes, down 34.8% from the year-ago figure. Further, potential housing revenues from backlog declined 35.5% from the prior-year period to $3.40 billion.

Nevertheless, the average community count rose 9% to 240 and the ending community count grew slightly from the year-ago period to 230.

Within homebuilding, the adjusted housing gross margin declined 550 basis points (bps) year over year to 21.5%. The decrease was due to lower pricing and other homebuyer concessions, higher construction costs and a shift in the mix of homes delivered.

Selling, general and administrative expenses (SG&A) — as a percentage of housing revenues — increased 130 bps from the year-ago figure to 10.2% owing to reduced operating leverage from lower housing revenues and higher sales commissions. Homebuilding’s operating margin (excluding inventory-related charges) was down 670 bps to 11.4%.

Financial Services: The segment's revenues rose 21.4% year over year to $7.3 million. Pretax income was $9.9 million, up from $4.6 million reported a year ago.

Financial Position

KB Home had cash and cash equivalents of $612.1 million as of Aug 31, 2023, up from $328.5 million at the fiscal 2022-end. The company had total liquidity of $1.7 billion, including $1.08 billion of available capacity under the unsecured revolving credit facility.

As of the fiscal third-quarter end, the debt-to-capital ratio was 30.6%, down from 33.4% at the fiscal 2022-end.

In the fiscal third-quarter 2023, it repurchased approximately 1.5 million shares of its outstanding common stock for $82.5 million.

Fiscal 2023 Guidance

For the full year, it anticipates housing revenues of about $6.31 billion (versus an earlier projection of $5.80-$6.20 billion), down from the fiscal 2022 level of $6.88 billion. ASP is likely to be $481,000 (compared with $485,000 of earlier expectation), down from $500,800 reported a year ago.

Homebuilding’s operating margin (assuming no inventory-related charges) is expected to be 11.3% versus an earlier expectation of 11%.

Assuming no inventory-related charges, KB Home expects the housing gross margin to be approximately 21.3% (versus 21.2% of earlier projection), down from 24.8% reported a year ago.

SG&A expenses, as a percentage of housing revenues, are likely to be 10% (earlier expectation was 10.3%). It still projects an effective tax rate of approximately 23%. The company expects the average community count to increase 9% and the ending community count to be roughly 230.

Zacks Rank & Key Picks

KB Home currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same space are as follows:

PulteGroup Inc. (PHM - Free Report) : The company has been reaping benefits from the successful execution of strategic initiatives to boost profitability, with a focus on entry-level homes. PulteGroup, presently sports a Zacks Rank #1 (Strong Buy), has jumped 67.9% year to date. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for its 2023 and 2024 earnings has been upwardly revised by 25.5% and 26.7%, respectively, over the past 60 days. Its earnings topped consensus estimate in three of the trailing four quarters and missed once, with the average surprise being 19.5%. Again, it carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.

M.D.C. Holdings (MDC - Free Report) : This U.S.-based homebuilding and financial services company gained 35% this year so far.

Earnings estimates for this Zacks Rank #1 company’s 2023 have increased to $4.94 per share from $3.44 per share over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in two of the trailing four quarters and missed on other two occasions, the positive average being 46%. Impressively, it carries a VGM Score of A.

Toll Brothers (TOL - Free Report) : This Horsham, PA-based company, a leading builder of luxury homes, has gained 53.5% this year so far.

TOL currently sports a Zacks Rank #1. Earnings estimates for fiscal 2023 have increased to $11.91 per share from $10.61 per share over the past 30 days. The company’s earnings topped the Zacks Consensus Estimate in all the trailing four quarters, the average being 31.4%.

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