KB Home (KBH Quick QuoteKBH - Free Report) reported impressive second quarter fiscal 2016 results. Quarterly adjusted earnings of 17 cents per share surpassed the Zacks Consensus Estimate of 16 cents by 6.3%. The bottom line also surged 70% from adjusted earnings of 10 cents reported in the prior-year quarter. 

KB HOME Price, Consensus and EPS Surprise

KB HOME Price, Consensus and EPS Surprise | KB HOME Quote

Total revenue of $811.1 million in the second quarter of 2016 beat the Zacks Consensus Estimate of $753 million by 7.7%. Revenues soared 30% year over year driven by a higher-than-expected increase in housing revenues.  

Quarter in Details

In the reported quarter, homebuilding revenues soared 30.2% year over year to $808.5 million driven by double-digit increase in the number of homes delivered.

Housing revenues of $807.4 million surged 33% from the year-ago period. Housing revenues significantly exceeded the company’s expected range of $710 million and $770 million.

Number of homes delivered jumped 30% to 2,329 homes, driven by double-digit increase across all the four segments. ASP of homes delivered rose 2% to $346,700. ASP of homes in the second quarter of 2016 missed management’s expectation of $360,000, owing to unfavorable shift in homes delivered to the West Coast. There were a greater proportion of lower priced homes sold in this coastal market.

Despite lower community count, net orders rose 8% to 3,249 homes driven by demand growth in the housing markets served by KB Home. Value of net orders climbed 14% to $1.20 billion. West Coast delivered strongest order numbers and values in the quarter. At the end of the quarter, average community count was 242, down 2% year over year, as the company opened lower number of communities in the quarter.  

At the end of second quarter 2016, the company’s backlog totaled 5,205 homes, up 10% year over year. Potential housing revenues from backlog increased 14% to $1.83 billion driven by higher backlog.

Adjusted homebuilding gross margin expanded 40 basis points (bps) year over year to 20.7%. The metric was adjusted for amortization expenses and inventory related charges. In line with management’s expectations, homebuilding gross margin remained flat sequentially.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) improved 140 bps to 11.6%, owing to increased housing revenue and cost control efforts.

Adjusted homebuilding operating margin (after excluding inventory related charges) increased 170 bps year over year to 4.7%, driven by an increase in gross margin and SG&A ratio.

Third Quarter 2016 Outlook

KB Home expects housing revenues to range between $900 million and $960 million in the quarter, driven by robust order growth. The company expects ASP in the range of $375,000 to $380,000 during the third quarter of fiscal 2016. Gross margin is expected to improve sequentially to 16.5%.

Fiscal 2016 Outlook

KB Home raised its housing revenue expectation to $3.45 billion to $3.70 billion from the prior expected range of $3.35 billion to $3.65 billion, which indicates a year-over-year increase from2015 levels. ASP is expected to increase 4%-6%, lower than the prior expectation of 6–8%. Assuming no further inventory impairment or land option contract abandonment charges, full-year gross margin is expected to be in the range of 16.7% to 16.9%, lower than the prior expectation of over 17%. Adjusted operating margin is expected to range between 5.8% and 6.0%.

KB Home currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the construction sector include TopBuild Corp. (BLD Quick QuoteBLD - Free Report) , Masco Corporation (MAS Quick QuoteMAS - Free Report) and GCP Applied Technologies Inc. . While TopBuild sports a Zacks Rank #1 (Strong Buy), Masco and GCP have a Zacks Rank #2 (Buy).

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