KB Home’s KBH shares gained 5.4% in yesterday’s after-hour trading, after the homebuilder beat earnings and revenue expectations in second-quarter fiscal 2019.
The results mainly benefited from continued progress of the Returns-Focused Growth plan, given stellar average community count growth. The company remains upbeat about further improvement in results in the second half of this year. This is a stark contrast from industry giant Lennar Corporation’s LEN soft view for the fiscal third quarter due to tariff-related woes.
Although the company’s results declined on a year-over-year basis, the $2.2-billion backlog is expected to drive gross margin improvement in the remainder of the year. KB Home believes declining mortgage rates, steady economic growth, high consumer confidence and favorable demographics, in particular household formation, to continue providing a healthy backdrop for the housing industry, which includes biggies like Lennar, PulteGroup, Inc. PHM and D.R. Horton, Inc. DHI.
Earnings & Revenue Discussion
Quarterly earnings of 51 cents per share outpaced the Zacks Consensus Estimate of 39 cents by 30.8% but declined 10.5% from 57 cents a year ago.
Total revenues of $1,021.8 million surpassed the consensus mark of $935 million by 9.3%. However, the top line declined 7.2% year over year, mainly due to lower average selling price (“ASP”) of homes delivered.
Homebuilding Revenues: In the reported quarter, the segment's revenues fell 7% from the prior-year period to $1,018.7 million due to lower ASP of homes delivered. While land generated $0.9 million in revenues (down from $6.9 million a year ago), housing revenues totaled $1,017.8 million (declining 6.8%).
Net orders grew 15.1% from the prior-year quarter to 4,064 homes, increasing in double digits across all regions served by the company. Value of net orders also increased 12.5% from the year-ago quarter to $1.53 billion.
Moreover, number of homes delivered increased 1.9% from the year-ago level to 2,768 units. Deliveries increased in two regions (Central and Southeast). However, ASP fell 8% from a year ago to $368,000, mainly due to a shift in geographic mix of homes delivered. Lower ASP in the West Coast region also added to the woes.
At the end of the reported quarter, average community count was 252, up 17% year over year. The company’s backlog totaled 5,927 homes (as of May 31, 2019), up 2% from a year ago. Potential housing revenues from backlog declined 2.8% from the prior-year period to $2.17 billion.
Housing gross margin increased 10 basis points (bps) year over year to 17.2% in the quarter. The increase reflects lower amortization of previously capitalized interest and a change in the company’s accounting for certain model complex costs.
Adjusted housing gross profit margin (a metric that excludes the amortization of previously capitalized interest and inventory-related charges) contracted 90 bps year over year to 21.3%.
As a percentage of housing revenues, selling, general and administrative (SG&A) expenses were 12.1%, up 170 bps from the year-ago figure. The rise was mainly led by lower housing revenues, higher marketing expenses to support new community openings and the impact of ASC 606 adoption.
Homebuilding operating margin deteriorated 170 bps on a year-over-year basis to 5.1%. After adjusting for inventory-related charges, operating margin came in at 5.5%, down 180 bps.
Financial Services revenues grew 13.9% year over year to $3.1 million.
KB Home Price, Consensus and EPS Surprise
KB Home price-consensus-eps-surprise-chart | KB Home Quote
KB Home had homebuilding cash and cash equivalents of $178.9 million as of May 31, 2019, lower than $574.4 million on Nov 30, 2018. Inventories were $3,780.9 million, up from $3,582.8 million as of Nov 30, 2018. KB Home had total liquidity of $597.4 million at the end of the quarter.
In the quarter under review, it used $180.9 million of net operating cash flow, mainly for investments in inventories.
The company spent nearly $399 million, of which 33.1% allotted for new land acquisitions, on land acquisitions and development in the quarter.
Its debt-to-capital ratio was 45.8% (improving 390 bps) as of May 31, 2019. Net debt to capital was 43.3% (reflecting an increase of 170 bps), which came in within the target range of 35-45% for the current year under the Returns-Focused Growth Plan.
KB Home expects to boost average community count year over year over the next two quarters and remains committed to realize a 10-15% increase in 2019.
It expects third-quarter housing revenues in the range of $1.1-$1.18 billion and ASP to be around $395,000-$400,000.
Assuming no inventory-related charges, the company expects housing gross margin to improve sequentially to the range of 17.9-18.5% and the figure is projected to further grow in the fourth quarter.
Homebuilding operating margin (excluding the impact of any inventory-related charges) is expected within 6.4-7%.
Moreover, SG&A ratio is projected in the range of 11.3-11.9%.
Effective tax rate is estimated to be 26% for the remaining quarters of 2019.
Fiscal 2019 Guidance
KB Home expects housing revenues in the range of $4.45-$4.6 billion. ASP will likely be in the range of $385,000-$390,000. Homebuilding operating margin (excluding the impact of any inventory-related charges) is expected in the range of 6.7-7.3%.
KB Home expects housing gross margin, excluding inventory-related charges, within 17.9-18.5%. SG&A ratio is projected in the range of 11-11.6%.
Lennar Corporation reported better-than-expected results in second-quarter fiscal 2019 (ended May 31, 2019), after missing estimates in the preceding quarter. Earnings and revenues increased on a year-over-year basis during the quarter.
Currently, KB Home carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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