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A month has gone by since the last earnings report for KB Home (KBH). Shares have added about 2% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important drivers.
KB Home Q3 Earnings Beat, Margins Rise, Stock Slides
KB Home reported third-quarter fiscal 2020 (ended Aug 31, 2020) results. Although both earnings and revenues topped the respective Zacks Consensus Estimate on solid housing gross margin, the company expects its ending community count to remain relatively flat sequentially for the next two quarters.
Earnings & Revenue Discussion
The company reported quarterly earnings of 83 cents per share, which surpassed the consensus estimate of 50 cents by 66%. Also, the metric grew 13.7% from the year-ago figure of 73 cents per share owing to improvement in housing gross margin.
Total revenues of $999 million topped the consensus mark of $896 million by 11.6% but fell 13.9% on year-over-year basis due to COVID-19 impacts.
Homebuilding: For the quarter under review, the segment’s revenues of $995.1million decreased 14% from the prior-year period. Under the homebuilding umbrella, land generated $16 million revenues (significantly up from $4.2 million a year ago), while housing revenues totaled $979.1 million (declining 15.1% from the prior year).
Number of homes delivered declined 15.8% from the year-ago level to 2,545 units. Average selling price or ASP, however, grew nearly 1% from a year ago to $384,700.
Net orders increased 27% from the prior-year quarter to 4,214 homes, marking the highest third-quarter level since 2005. Value of net orders also rose 29% from the year-ago quarter to $1.64 billion. Net orders were up 11% in June, 23% in July and 50% in August.
For the reported quarter, average community count was down 7% from a year ago to 238. Quarter-end community count was 232, down 9% from the prior year. Net orders per community averaged 5.9 per month compared with 4.3 a year ago.
Cancellation rate, as a percentage of gross orders, decreased to 17% from 20% reported a year ago. Its quarter-end backlog totaled 6,749 homes (as of Aug 31, 2020), up 8% from a year ago. Potential housing revenues from backlog also grew 12% from the prior-year period to $2.57 billion. This marked the highest third quarter-end backlog (in terms of both homes and value) since 2007.
Homebuilding operating margin (excluding inventory related charges) improved 180 basis points (bps) to 9.6%. Within homebuilding, housing gross margin (excluding inventory-related charges) improved 170 bps year over year. The increase was attributed to a mix shift of homes delivered, lower amortization of previously capitalized interest, workforce realignment, COVID-19-related cost reductions during the fiscal second quarter and a favorable pricing.
Adjusted housing gross margin — which excludes inventory-related charges and the amortization of previously capitalized interest — registered an improvement of 140 bps year over year to 23.7%. As a percentage of housing revenues, selling, general and administrative expenses improved slightly to 11% from the year-ago figure backed by reduced overhead costs, partly offset by decreased operating leverage from lower housing revenues.
Financial Services revenues fell 1.7% year over year to $3.87 million. KBHS Home Loans, LLC originated 79% of the residential mortgage loans that the company’s customers obtained to finance their home purchase compared with 72% in the prior year.
KB Home had cash and cash equivalents of $722 million as of Aug 31, 2020, significantly up from $453.8 million on Nov 30, 2019. The company had total liquidity of $1.51 billion, including $787.6 million of available capacity under the unsecured revolving credit facility.
Inventories marginally decreased to $3.67 billion from $3.7 billion as of Nov 30, 2019. Lots owned or under contract were 60,278, up 8.2% from fiscal 2019-end. Of these, 38,110 owned lots represented approximately 3.3 years’ supply, based on homes delivered in the trailing 12 months.
Its debt to capital was 40.5%, which improved 180 bps from Nov 30, 2019. Net debt to capital was 28.6% as of Aug-end, which improved 660 bps.
A Look at Recent Market Trends & Guidance
KB Home has been witnessing a significant increase in demand over the past several months on the back of resilient housing market. Its net orders for the first three weeks of September were up 32% year over year. Cancellation also improved to 12% from 17% reported in the corresponding year-ago period. Notably, the company has resumed land acquisition and development activities to bolster the lot pipeline and support community growth in the future.
KB Home expects fourth-quarter housing revenues within $1.05-$1.15 billion. Also, it now projects the midpoint of its fiscal 2020 housing revenue guidance to be up more than $200 million.
ASP for the fourth quarter is likely to be $415,000. Housing gross margin is projected within 20-20.4% for the fourth quarter. SG&A will likely be in the 10.8-11.2% range for the fourth quarter.
Fourth-quarter homebuilding operating margin, excluding inventory related charges, is expected in the range of 9-9.4%. For 2020, it now expects the metric to grow 120 bps from the midpoint of the previous guided range of 6.4-7.2%.
Average community count for the fourth quarter is likely to decline in mid-to-high single digits.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -16.25% due to these changes.
Currently, KB Home has a great Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second 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 these revisions indicates a downward shift. Notably, KB Home has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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