It has been about a month since the last earnings report for KB Home (KBH). Shares have added about 12.6% 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 the most recent earnings report in order to get a better handle on the important catalysts.
KB Home’s (KBH) Q2 Earnings Miss Estimate, Margin Up Y/Y
KB Home reported lackluster results for second-quarter fiscal 2020 (ended May 31, 2020), wherein earnings and revenues lagged the respective Zacks Consensus Estimate. On a year-over-year basis, its bottom line increased while top line declined on lower deliveries and average selling price (ASP).
Earnings & Revenue Discussion
The company’s quarterly earnings of 55 cents per share missed the consensus estimate of 57 cents by 3.5%. Nonetheless, the metric grew 7.8% from the year-ago figure of 51 cents per share owing to improvement in housing gross profit margin and pretax income.
Total revenues of $914 million lagged the consensus mark of $1.07 billion by 14.8% and fell more than 10% year over year.
Homebuilding: In the quarter under review, the segment's revenues of $910.3 million decreased 10.6% from the prior-year period. Under the homebuilding umbrella, land generated $0.3 million revenues (significantly down from $0.87 million a year ago), while housing revenues totaled $910 million (declining 10.6% from the prior year).
Number of homes delivered slipped 9.7% from the year-ago level to 2,499 units. Deliveries decreased in all the four regions served by the company (West Coast, Southwest, Central and Southeast). ASP also fell 1% from a year ago to $364,100.
Net orders decreased 57% from the prior-year quarter to 1,758 homes. Value of net orders also decreased a whopping 55.1% from the year-ago quarter to $688.4 million. Net orders were down 10% in March, 107% in April and 55% in May.
In the reported quarter, average community count was down 2% from a year ago to 247. Quarter-end community count was 244, down 4% from the prior year. Net orders per community averaged 2.4 per month compared with 5.4 a year ago, which marked the highest second-quarter net order pace in the past several years.
Cancellation rate, as a percentage of gross orders, grew 43% year over year. The metric came in at 20%, 114% and 34% in March, April and May, respectively. The gradual improvement in cancellation was mainly due to proactive efforts undertaken by the company amid the unprecedented nationwide economic and employment disruptions resulting from the pandemic.
Its quarter-end backlog totaled 5,080 homes (as of May 31, 2020), down 14.3% from a year ago. Potential housing revenues from backlog declined 12.4% from the prior-year period to $1.9 billion.
Homebuilding operating margin (excluding inventory and severance related charges) improved 140 basis points (bps) to 6.9%. Within homebuilding, housing gross margin (excluding inventory-related charges) improved 110 bps year over year. The increase was attributed to a mix shift of homes delivered and lower amortization of previously capitalized interest, partly offset by reduced operating leverage due to low housing revenues.
Adjusted housing gross margin — which excludes inventory-related charges and the amortization of previously capitalized interest — registered an improvement of 60 bps year over year to 21.9%. As a percentage of housing revenues, selling, general and administrative expenses grew 50 bps from the year-ago figure.
Financial Services revenues grew 17.8% year over year to $3.69 million on the back of strength in its mortgage banking joint venture, KBHS Home Loans, LLC ("KBHS"). Notably, KBHS originated 76% of the residential mortgage loans that the company’s customers obtained compared with 69% in the prior year.
KB Home had cash and cash equivalents of $575 million as of May 31, 2020, up from $453.8 million on Nov 30, 2019. The company had total liquidity of $1.36 billion, including $787.6 million of available capacity under the unsecured revolving credit facility.
Inventories marginally decreased to $3.61 billion from $3.7 billion as of Nov 30, 2019. Lots owned or under contract were 60,480, down 7% from fiscal 2019-end, reflecting fewer optioned lots. Of these, 37,589 owned lots represented approximately 3.1 years’ supply, based on homes delivered in the trailing 12 months.
Its debt to capital was 41.5% (which improved 80 bps from Nov 30, 2019). Net debt to capital was 32.4% as of May-end, up 280 bps.
KB Home has effectively resumed nearly all core operations and witnessed an improvement in gross and net orders, as well as the cancellation rate in the first three weeks of June. The sequential improvement is an indicator of underlying strength in the overall housing market.
Gross and net orders for the first three weeks of June increased 4% and 2% year over year, respectively. On a sequential basis, the metrics were up 22% and 48%, respectively. Cancellation rate for this period was 21%, nearly flat with the year-earlier figure.
As the economy tends to recover, the company expects the housing market to improve. However, the speed, trajectory and strength of any such recovery remain highly uncertain. Given this uncertainty, it will proceed with land acquisition and development, as well as preserve cash and liquidity.
The company expects third-quarter housing revenues within $820-$880 million. Also, it projects housing revenues between $3.75 billion and $3.95 billion for 2020. ASP for the third quarter is likely to be in the range of $395,000-$400,000. For 2020, the metric is projected within $385,000-$395,000.
Housing gross margin is projected within 18.8-19.4% for the third quarter and 18.6-19.2% for 2020. SG&A will likely be in the 12.7-13.3% range for the third quarter and 11.8-12.4% for 2020 (excluding severance charges).
Third-quarter homebuilding operating margin, excluding inventory related charges, is expected in the range of 5.7-6.5%. For 2020, it expects the metric — excluding inventory and severance charges — in the range of 6.4-7.2%.
Average community count for the third quarter is likely to decline in low-single digits. For the full year, the company projects no change in the average community count on a year-over-year basis.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -19.77% due to these changes.
Currently, KB Home has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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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