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KB Home Beats on Q2 Earnings & Revenues, Orders Strong

Zacks Equity Research

Share price of KB Home (KBH) shot up 4.53% as the leading homebuilder’s fiscal second quarter results, ended May 31,2014, surpassed the Zacks Consensus Estimate for both revenue and earnings for the second quarter in a row.

KB Home’s adjusted earnings of 27 cents per share in the second quarter beat the Zacks Consensus Estimate of 21 cents by 28.6% and improved significantly from the year-ago loss of 4 cents per share. The strong earnings came on the back of solid revenues, increase in housing gross profit margin, and improved selling, general and administrative expense ratio.

The company’s improved results in the quarter were driven by its strategy to shift towards land constrained submarkets, which shored up both prices and margins.

Total revenue of $565.0 million in the second quarter beat the Zacks Consensus Estimate of $553 million by 3.2%. Revenues increased 8% from the year-ago quarter due to an increase in pricing.

Quarter Details

In the second quarter of fiscal 2014, homebuilding revenues increased 7.8% year over year to $562.4 million driven by a double digit increase in pricing and improved order trends.

The number of homes delivered decreased 2.6% from the year-ago quarter to 1,751 homes as the company delivered lower number of homes in all the regions except Central region.

The Central region reported a 43% increase in revenue. Revenue was flat in Southwest, and Southeast as the regions recorded lower backlog at the beginning of the second quarter. Revenue declined 5% in West Coast due to difficult year over year comparisons. West Coast revenues had increased in double digits in the prior year quarter.

However, average selling price (ASP) rose 10% year over year (representing the 7th consecutive quarter double digit hike) to $319,700, driven by strategic shift in product mix. With more communities in lucrative submarkets, KB Home shifted its product mix towards high priced homes. This way the company could cater to high income consumers. This trend is also reflected in the company’s backlog values.

The company’s backlog totaled 3,398 homes as of May 31, 2014, up 9% year over year. Potential housing revenues from backlog rose 24% to $1.03 billion owing to higher number of homes in backlog and increased pricing. At the end of the quarter, the company had 191 active communities, up 7% from the prior-year quarter.

Net orders rose 5% in the quarter to 2,269 homes driven by the company’s aggressive investment in land and land development in the prior quarters. The value of net orders increased 19% to $763.2 million.

KB Home had been witnessing soft order growth in the second half of 2013 due to lack of land and lots. However, order trends started improving from the first quarter of 2014, which was driven by aggressive land investments made by the company in the past quarters. The company spent $1.14 billion in land investment in fiscal 2013, significantly more than $564.9 million spent in 2012. The company continued its land investments and spent $859.6 million on land in the first six months of fiscal 2014.

Adjusted homebuilding gross margin (excluding $.4 million of land option contract abandonment charges) improved 70 basis points (bps) to 18.9%, driven by price increases and a favorable community mix. Including land option contract abandonment charges, housing gross profit margin rose 380 basis points to 18.9%.

The selling, general & administrative (SG&A) expense ratio improved 60 bps year over year to 12.8% in the quarter due to the company’s cost reduction initiatives and increased revenues.

2014 Outlook

The company continues to expect gross margins to continue to improve during the rest of fiscal 2014 and believes that it may meet the target of 20% in 2014. The company expects further increase in community count particularly in the second half of fiscal 2014, with more than 80 community openings planned.

KB Home carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Investors interested in the building construction/building products sector can consider stocks like Gafisa S.A. (GFA), United Rentals, Inc. (URI) and TRI Pointe Homes, Inc. (TPH). All the three companies hold a Zacks Rank #2 (Buy).

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