KB Home Curtails Loss, Lags Zacks

Zacks

KB Home (KBH) reported adjusted net loss per share (including an income tax benefit) of 31 cents in the second quarter of fiscal 2012, narrower than the adjusted loss (including an income tax benefit) of 89 cents per share in the year-ago quarter.

A double-digit rise in revenues and higher net order growth led to the narrower loss in the quarter. The loss was also narrower than the Zacks Consensus loss estimate of 36 cents per share.

Total revenue increased 11% over the year-ago quarter to $302.9 million driven by increase in homes delivered, net orders selling price hike. Total revenue also breezed past the Zacks Consensus Estimate of $300 million.

Homebuilding Revenue and Income

Housing revenue increased 11.3% over the prior-year quarter to $300.6 million, driven by net order growth.

Net orders grew 3% in the second quarter of 2012 to 2,049 homes from 1,998 homes in the year-ago quarter due to strong performance of the West Coast and the Central regions, partially offset by weak results from the Southwest and Southeast regions.

The value of net orders grew 18% to $503.1 million in the second quarter of 2012 from $427.5 million in the second quarter of 2011. The net orders of the second quarter of 2012 grew 71% from the previous quarter of 2012.

The number of homes delivered increased 2% to 1,290 homes in the quarter while average selling price rose 9% to $233,000.

As a percentage of gross orders, the company’s cancellation rate was 26% in the quarter compared with 25% in the prior-year period.

The company’s homebuilding business (including housing and land) reported gross margin of 20.3% in the second quarter of 2012 (excluding inventory impairment charges), up from 14.9% in the second quarter of 2011. 

The company’s backlog totaled 2,962 homes as of May 31, 2012, up 22% from 2,422 homes as of May 31, 2011. Potential housing revenues from backlog rose 38% to $693.4 million from $501.5 million, primarily due to increases in backlog revenue in all operating regions.

Financial Services Revenue and Income

The pre tax income of Financial Services business, which includes KB Home’s equity interest in an unconsolidated mortgage banking joint venture, declined 7.9% to $1.5 million in the second quarter of 2012.

KB Home has an agreement with Texas-based premier mortgage services provider Nationstar Mortgage. As per the terms of the agreement, Nationstar is KB Home’s preferred mortgage lender for its customers. The agreement did not have much impact on the results of the second quarter of 2012 but the company expects its positive influence in the future.

Financial Position

The company had total cash and cash equivalents (including unrestricted cash of $314.3 million) of $377.4 million as of May 31, 2012, versus cash and cash equivalents of $368.1 million (including unrestricted cash of $304.2 million) as of February 29, 2012.

Outlook

The company expects to be profitable by the fourth quarter of 2012 and for the full year 2013. The company expects the revenue of the fourth quarter to grow 35% over the third quarter results, owing to higher backlog conversion rate and average selling price in the fourth quarter 2012.

The company intends to make a strategic shift in its geographic footprint. The focus is to place the communities in highly desirable land-constrained submarkets that enable it to sell larger, higher priced homes, thus driving a strong increase in average selling price.

The company intends to open about 25 new communities during the third and fourth quarter 2012. Furthermore, it plans to acquire and develop land to ensure profitability in 2013.

Our Recommendation

We believe that the housing market is slowly stabilizing with an increase in employment rates and higher consumer confidence. We appreciate the company’s strategic initiatives like overhead reduction, margin expansion, and land investments towards higher priced, better located communities.

We believe that these initiatives along with the Nationstar deal will help the company in the long run. However, we are aware that the market is still experiencing uneven recovery and the company may need time in order achieve profitability.

We currently have a Neutral recommendation on KB Home. The stock carries a Zacks #3 Rank (a short-term Hold rating). One of its peers, Toll Brothers Inc. (TOL), presently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.

Based in Los Angeles, California, KB Home is a homebuilder with operations in the nine states and 32 major markets in the U.S. The company caters to first-time, move-up and active adult homebuyers, and builds single-family homes, town homes and condominiums. KB Home also provides mortgage banking, title and insurance services to homebuyers.

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