It has been about a month since the last earnings report for KB Home (KBH - Free Report) . Shares have added about 12.4% 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 its most recent earnings report in order to get a better handle on the important drivers.
KB Home's (KBH - Free Report) Q3 Earnings Beat, Revenues Miss Estimates
KB Home reported third-quarter fiscal 2019 results, wherein earnings beat analysts’ expectation but revenues missed the same.
The results mainly benefited from continued progress of the Returns-Focused Growth plan, given stellar average community count growth. Although the company’s top and bottom lines declined on a year-over-year basis, it remains upbeat about improvement in fiscal fourth-quarter results.
KB Home’s $2.3-billion backlog is expected to drive growth in 2020. It believes that declining mortgage/interest rates, steady economic growth and favorable demographics — in particular household formation — will continue providing a healthy backdrop for the housing industry, which includes biggies like Lennar , PulteGroup, Inc. and D.R. Horton, Inc.
Earnings & Revenue Discussion
Quarterly earnings of 73 cents per share outpaced the Zacks Consensus Estimate of 65 cents by 12.3% but declined 16.1% from 87 cents a year ago.
Total revenues of $1,160.8 million missed the consensus mark of $1,170 million by 0.8%. In addition, the top line declined 5.3% year over year, mainly due to lower average selling price (“ASP”) of homes delivered.
Homebuilding Revenues: In the reported quarter, the segment's revenues fell 5.3% from the prior-year period to $1,156.9 million due to lower ASP of homes delivered. While land generated $4.2 million in revenues (up from $2.3 million a year ago), housing revenues totaled $1,152.6 million (declining from $1,219.6 million). The decrease in housing revenues mainly stemmed from a decline in ASP in the West Coast region due to mix shift toward deliveries in lower-price inland markets and the absence of certain communities with relatively high ASPs that closed out in prior quarters.
Net orders grew 24% from the prior-year quarter to 3,325 homes, increasing in double digits across all regions served by the company. Value of net orders also increased 25% from the year-ago quarter to $1.28 billion.
Moreover, number of homes delivered increased 1.1% from the year-ago level to 3,022 units. Deliveries increased in three regions (West Coast, Central and Southeast). However, ASP fell 7% from a year ago to $381,400, mainly due to a shift in geographic mix of homes delivered. Lower ASP in the West Coast region also added to the woes.
At the end of the reported quarter, average community count was 255, up 18% year over year. Notably, net orders per community averaged 4.3 per month in the quarter, up from 4.1 recorded in the prior year. The company’s backlog totaled 6,230 homes (as of Aug 31, 2019), up 14% from a year ago. Potential housing revenues from backlog grew 13% from the prior-year period to $2.04 billion.
Housing gross margin increased 50 bps year over year to 18.5% in the quarter. The increase reflects lower amortization of previously capitalized interest and a change in its accounting for certain model complex costs.
Adjusted housing gross profit margin (a metric that excludes the amortization of previously capitalized interest and inventory-related charges) declined 80 bps year over year to 22.3%.
As a percentage of housing revenues, selling, general and administrative (SG&A) expenses were 11.1%, up 170 bps from the year-ago figure. The rise was mainly led by lower housing revenues, higher marketing expenses to support new community openings and the impact of ASC 606 adoption.
Homebuilding operating margin deteriorated 120 bps on a year-over-year basis to 7.4%. After adjusting for inventory-related charges, operating margin came in at 7.8%, down 150 bps.
Financial Services revenues grew 13.2% year over year to $3.9 million.
KB Home had homebuilding cash and cash equivalents of $183.8 million as of Aug 31, 2019, lower than $574.4 million on Nov 30, 2018. Inventories were $3,919.1 million, up from $3,582.8 million as of Nov 30, 2018. KB Home had total liquidity of $610.8 million at the end of the quarter.
The company spent nearly $442 million, of which 39.4% was allotted for new land acquisitions in the quarter.
Its debt-to-capital ratio was 45.1% (which improved 460 bps from Nov 30, 2018). Net debt to capital ratio was 42.6% in the quarter.
Fiscal Q4 Guidance
KB Home expects average community count to increase 10% year over year in the fourth quarter and 12% in 2019.
It expects fourth-quarter housing revenues in the range of $1.56-$1.64 billion (indicating growth from $1.34 billion in the prior year) and ASP to be around $400,000-$410,000 (implying improvement from $395,200 a year ago).
Assuming no inventory-related charges, the company expects housing gross margin to improve sequentially and on a year-over-year basis to the range of 18.8-19.5%.
Homebuilding operating margin — excluding the impact of any inventory-related charges — is expected within 9.9-10.5% (suggesting an increase from 9.7% a year ago).
Moreover, SG&A ratio is projected in the range of 8.8-9.2%.
Effective tax rate is estimated to be 28% for the quarter.
Preliminary 2020 Targets
KBH expects revenues in the range of $4.9-$5.3 billion. The company believes that it should benefit from the land investments over the past 12 months, thereby helping it to achieve community growth in mid-single digits on a year-over-year basis.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 8.47% due to these changes.
Currently, KB Home has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise KB Home has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.