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KB Home (KBH) Up 9.1% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for KB Home (KBH - Free Report) . Shares have added about 9.1% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Second-Quarter Fiscal 2017 Results

KB Home reported stellar second-quarter fiscal 2017 results on solid housing fundamental.

The company’s quarterly earnings of $0.33 per share outpaced the Zacks Consensus Estimate of $0.26 by 26.9% and increased by a significant 94% from the year-ago profit level of $0.17.

Total revenue of $1 billion in the quarter beat the Zacks Consensus Estimate of $922 million by 8.8%. The top line increased 24% year over year, driven by higher housing revenues.

Segment Details

Homebuilding Revenue: In the reported quarter, homebuilding revenues grew 23.7% year over year to $1,000.1 million, driven by a double-digit increase in the number of homes delivered. Land generated $4.4 million in revenues, reflecting an increase of 318.6%. Housing revenues of $995.7 million improved 23.3% from the year-ago quarter.

Net orders increased 5.1% to 3,416 homes, driven by higher demand in the housing markets served by KB Home across the board, barring Southeast region. Value of net orders increased 15% to $1,383.5 million.

Number of homes delivered jumped 11% to 2,580 homes, buoyed by double-digit increases in the company's West Coast, Southwest and Central regions. The company’s Southeast region faced 9.1% decline in deliveries. Average selling price went up 11% to $385,900.

At the end of the reported quarter, average community count was 238, reflecting a decline of 2% year over year. The decrease was due to a 26% decline in its Southeast region.

The company’s backlog totaled 5,612 homes (as of May 31, 2017), increasing 8% year over year. Potential housing revenues from backlog increased 19% to $2.18 billion, with West Coast and Southwest regions registering double-digit gains.

Margins

Adjusted housing gross profit margin (excluding the amortization of previously capitalized interest and inventory-related charges) expanded 30 basis points (bps) year over year to 21%.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) were 10.4%, down 120 bps year over year. This marks the lowest second-quarter ratio in the company's history.

Adjusted homebuilding operating margin (after excluding inventory-related charges) increased 90 bps year over year to 5.6%.

Financial Services: In the quarter, Financial Services’ revenues grew 5.2% year over year to $2.7 million.    

Financial Position

KB Home had homebuilding cash and cash equivalents of $348.6 million as of May 31, 2017, lower than $592.1 million as of Nov 30, 2016.

Net debt was $2.16 billion as of May 31, 2017 compared with $2.05 billion as of Nov 30, 2016. This reflects a net debt-to-capitalization ratio of 54.9% in the quarter, slightly higher than 54.3% at the end of 2016.

Third-Quarter Guidance

KB Home expects homebuilding revenues between $1.08 billion and $1.15 billion, ASP in the range of approximately $405,000–$410,000 (reflecting 11% to 12% growth), and SG&A ratio likely to be around 10.1%.

Homebuilding gross margin is likely to be between 16.4% and 16.7%. It also expects fourth quarter gross margins to be in the range of 17.6–18%, up 50 bps from the midpoint from the previous guided range.

It anticipates third-quarter average community count to be flat year over year.

Tax rate for the remaining two quarters of 2017 is expected to be approximately 39%.

Fiscal 2017 Guidance

KB Home increased its homebuilding revenues to the range of $4.2-$4.4 billion from the prior guidance of $4–$4.3 billion. The new range reflects expected growth of 20% from the 2016 level. ASP is now expected to be around $390,000–$400,000 from $385,000–$395,000, reflecting an increase of 7–10%.

The company expects housing gross margin in the range of 16.3–16.7% compared with the prior expectation of 16–16.5%.

SG&A, as a percentage of sales, is expected to be approximately 10–10.3% against 10–10.4% expected earlier. Homebuilding operating margin is projected in the 6–6.6% band (earlier 5.8–6.4%). The company expects community count to remain flat in the year.

The company remains on track to attain net-to-debt capital ratio in the range of its stated goal of 40–50% in the near to mid-term.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to three lower.

KB Home Price and Consensus

VGM Scores

At this time, KB Home's stock has a nice Growth Score of 'B', though it is lagging on the momentum front with a 'D'. The stock was allocated a grade of 'B' on the value side, putting it in the top 40% 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.

Based on our scores, the stock is equally suitable for value and growth investors.

Outlook

While estimates have been broadly trending downward for the stock, the magnitude of these revisions has been net zero. Notably, the stock has a Zacks Rank #1 (Strong Buy). We are looking for an above average return from the stock in the next few months




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