It has been about a month since the last earnings report for KB Home (KBH). Shares have added about 2.8% 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 its most recent earnings report in order to get a better handle on the important drivers.
KB Home Q4 Earnings Beat Estimates, Revenue Miss
KB Home ended fiscal 2019 on an impressive note, with fourth-quarter fiscal 2019 earnings beating analysts’ expectation.
That said, strong demand for its built-to-order products at affordable price points, together with limited inventory in markets served drove net order growth of 38% in the quarter. Strong backlog and impressive housing gross margins will enable KB Home to improve profitability and return on equity in fiscal 2020.
Earnings & Revenue Discussion
Quarterly earnings of $1.31 per share outpaced the Zacks Consensus Estimate of 1.29 cents by 1.6% and increased 36% from a year ago.
Total revenues of $1,558.7 million missed the consensus mark of $1,599 million by 2.9%. That said, the top line grew by a notable 15.6% year over year, mainly due to higher home deliveries, partly offset by lower average selling price (ASP) of homes delivered.
Homebuilding Revenues: In the reported quarter, the segment's revenues advanced 15.6% from the prior-year period to $1,553.3 million due to higher deliveries. Under the homebuilding umbrella, land generated $11.1 million revenues (up from $4.7 million a year ago), while housing revenues totaled $1,542.2 million (increasing 15.2% from $1,339.3 million in the prior year).
Moreover, number of homes delivered increased 15.9% from the year-ago level to 3,929 units. Deliveries increased in all the four regions served (West Coast, Southwest, Central and Southeast). However, ASP fell 0.7% from a year ago to $392.5, mainly due to a decline in ASP in the West Coast and Southeast regions.
At the end of the reported quarter, average community count was 253, up 9% year over year. Notably, net orders per community averaged 3.7 per month in the quarter, up from 2.9 recorded in the prior-year quarter.
Net orders grew 38% from the prior-year quarter to 2,777 homes, increasing in double digits across all regions served by the company, baring Southeast. Value of net orders also increased by a whopping 43% from the year-ago quarter to $1.06 billion.
The company’s backlog totaled 5,078 homes (as of Nov 30, 2019), up 23.6% from a year ago. Potential housing revenues from backlog grew 26.4% from the prior-year period to $1.81 billion.
Housing gross margin expanded 150 basis points (bps) year over year to 19.6% in the quarter. Excluding inventory-related charges, housing gross profit margin increased 120 bps to 19.9%. The increase reflects lower amortization of previously capitalized interest and the adoption of a new accounting standard.
As a percentage of housing revenues, selling, general and administrative (SG&A) expenses were 9.1%, up 10 bps from the year-ago figure. The rise was mainly due to the impact of ASC 606 adoption.
Homebuilding operating margin improved 140 bps on a year-over-year basis to 10.5%. After adjusting for inventory-related charges, operating margin came in at 10.7%, up 100 bps.
Financial Services revenues grew 6.7% year over year to $5.3 million.
KB Home had homebuilding cash and cash equivalents of $453.8 million as of Nov 30, 2019, lower than $574.4 million on Nov 30, 2018. Inventories were $3,704.6 million, up from $3,582.8 million as of Nov 30, 2018. KB Home had total liquidity of $1.23 billion at the end of fiscal 2019.
The company invested $1.6 billion in land acquisitions and development in fiscal 2019, and generated $251 million of net operating cash flow.
Its debt-to-capital ratio was 42.3% (which improved 740 bps from Nov 30, 2018). Net debt-to-capital ratio was 35.2% as of Nov 30, 2019.
Fiscal 2019 Highlights
Earnings came in at $2.85 per share for the full year, reflecting an increase of 67.1% from $1.71 a year ago. Total revenues of $4,552.7 million also grew 0.1% from the fiscal 2018 level. Homebuilding revenues also improved marginally from a year ago to $4,537.7 million. Homes delivered jumped 5% year over year to 11,871, while ASP decreased 5% to $380,000.
KB Home expects average community count to increase in the mid-single-digit range in first-quarter fiscal 2020 and in the low to mid-single-digit range in fiscal 2020.
It expects first-quarter housing revenues in the range of $910-$917 million, indicating an increase of 18% from the year-ago period, considering the midpoint of the range. For fiscal 2020, it still anticipates housing revenues in the range of $4.9-$5.3 billion.
ASP is expected to be approximately $375,000 for the fiscal first quarter, while the same is expected between $380,000 and $400,000 for the full year.
Assuming no inventory-related charges, the company expects housing gross margin to improve 40 bps year over year to the range of 17.8-18.2% for the fiscal first quarter. For fiscal 2020, the metric is expected in the range of 18.7-19.3%, indicating an improvement of 30 bps (considering the midpoint of the range) from the prior year.
For the fiscal first quarter, homebuilding operating margin — excluding the impact of any inventory-related charges — is expected within 4.9-5.3% (up 80 bps at the midpoint from a year ago). For the full year, the metric is expected between 7.9% and 8.5%, suggesting an improvement of 50 bps at the midpoint from the prior year.
Moreover, SG&A ratio is projected in the range of 12.7-13.1% for the quarter and 10.5-11.1% for the year.
Effective tax rate is estimated to be approximately 20% for the quarter and 23% for the year.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
Currently, KB Home has a great Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, 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.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision looks promising. Notably, KB Home has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.