KB Home (KBH) Q4 Earnings Beat, Shares Slip on Revenue Miss
KB Home KBH ended fiscal 2019 on an impressive note, with fourth-quarter fiscal 2019 earnings beating analysts’ expectation. However, lower-than-expected revenues most likely hurt investors’ sentiment, prompting a decline of 2.1% in KB Home’s shares in the after-market trading session, following the news.
That said, strong demand for its built-to-order products at affordable price points, together with limited inventory in markets served drove net order growth of 38% in the quarter. Strong backlog and impressive housing gross margins will enable KB Home to improve profitability and return on equity in fiscal 2020.
Earnings & Revenue Discussion
Quarterly earnings of $1.31 per share outpaced the Zacks Consensus Estimate of 1.29 cents by 1.6% and increased 36% from a year ago.
Total revenues of $1,558.7 million missed the consensus mark of $1,599 million by 2.9%. That said, the top line grew by a notable 15.6% year over year, mainly due to higher home deliveries, partly offset by lower average selling price (ASP) of homes delivered.
KB Home Price, Consensus and EPS Surprise
KB Home price-consensus-eps-surprise-chart | KB Home Quote
Segment Details
Homebuilding Revenues: In the reported quarter, the segment's revenues advanced 15.6% from the prior-year period to $1,553.3 million due to higher deliveries. Under the homebuilding umbrella, land generated $11.1 million revenues (up from $4.7 million a year ago), while housing revenues totaled $1,542.2 million (increasing 15.2% from $1,339.3 million in the prior year).
Moreover, number of homes delivered increased 15.9% from the year-ago level to 3,929 units. Deliveries increased in all the four regions served (West Coast, Southwest, Central and Southeast). However, ASP fell 0.7% from a year ago to $392.5, mainly due to a decline in ASP in the West Coast and Southeast regions.
At the end of the reported quarter, average community count was 253, up 9% year over year. Notably, net orders per community averaged 3.7 per month in the quarter, up from 2.9 recorded in the prior-year quarter.
Net orders grew 38% from the prior-year quarter to 2,777 homes, increasing in double digits across all regions served by the company, baring Southeast. Value of net orders also increased by a whopping 43% from the year-ago quarter to $1.06 billion.
The company’s backlog totaled 5,078 homes (as of Nov 30, 2019), up 23.6% from a year ago. Potential housing revenues from backlog grew 26.4% from the prior-year period to $1.81 billion.
Margins
Housing gross margin expanded 150 basis points (bps) year over year to 19.6% in the quarter. Excluding inventory-related charges, housing gross profit margin increased 120 bps to 19.9%. The increase reflects lower amortization of previously capitalized interest and the adoption of a new accounting standard.
As a percentage of housing revenues, selling, general and administrative (SG&A) expenses were 9.1%, up 10 bps from the year-ago figure. The rise was mainly due to the impact of ASC 606 adoption.
Homebuilding operating margin improved 140 bps on a year-over-year basis to 10.5%. After adjusting for inventory-related charges, operating margin came in at 10.7%, up 100 bps.
Financial Services revenues grew 6.7% year over year to $5.3 million.
Financial Position
KB Home had homebuilding cash and cash equivalents of $453.8 million as of Nov 30, 2019, lower than $574.4 million on Nov 30, 2018. Inventories were $3,704.6 million, up from $3,582.8 million as of Nov 30, 2018. KB Home had total liquidity of $1.23 billion at the end of fiscal 2019.
The company invested $1.6 billion in land acquisitions and development in fiscal 2019, and generated $251 million of net operating cash flow.
Its debt-to-capital ratio was 42.3% (which improved 740 bps from Nov 30, 2018). Net debt-to-capital ratio was 35.2% as of Nov 30, 2019.
Fiscal 2019 Highlights
Earnings came in at $2.85 per share for the full year, reflecting an increase of 67.1% from $1.71 a year ago. Total revenues of $4,552.7 million also grew 0.1% from the fiscal 2018 level. Homebuilding revenues also improved marginally from a year ago to $4,537.7 million. Homes delivered jumped 5% year over year to 11,871, while ASP decreased 5% to $380,000.
Guidance
KB Home expects average community count to increase in the mid-single-digit range in first-quarter fiscal 2020 and in the low to mid-single-digit range in fiscal 2020.
It expects first-quarter housing revenues in the range of $910-$917 million, indicating an increase of 18% from the year-ago period, considering the midpoint of the range. For fiscal 2020, it still anticipates housing revenues in the range of $4.9-$5.3 billion.
ASP is expected to be approximately $375,000 for the fiscal first quarter, while the same is expected between $380,000 and $400,000 for the full year.
Assuming no inventory-related charges, the company expects housing gross margin to improve 40 bps year over year to the range of 17.8-18.2% for the fiscal first quarter. For fiscal 2020, the metric is expected in the range of 18.7-19.3%, indicating an improvement of 30 bps (considering the midpoint of the range) from the prior year.
For the fiscal first quarter, homebuilding operating margin — excluding the impact of any inventory-related charges — is expected within 4.9-5.3% (up 80 bps at the midpoint from a year ago). For the full year, the metric is expected between 7.9% and 8.5%, suggesting an improvement of 50 bps at the midpoint from the prior year.
Moreover, SG&A ratio is projected in the range of 12.7-13.1% for the quarter and 10.5-11.1% for the year.
Effective tax rate is estimated to be approximately 20% for the quarter and 23% for the year.
Zacks Rank
KB Home — which shares space with D.R. Horton, Inc. DHI and PulteGroup, Inc. PHM in the Zacks Building Products - Home Builders industry — currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Peer Release
Lennar Corporation LEN reported fourth-quarter fiscal 2019 earnings of $2.13 per share, surpassing the Zacks Consensus Estimate of $1.90 by 12.1%. Also, the reported figure jumped 15.8% from $1.84 reported in the year-ago quarter (excluding one-time gain of 58 cents per share from the sale of Rialto and non-recurring expenses). The upside was mainly driven by higher deliveries and continued operating leverage, backed by technological efforts. Revenues of $6.97 billion topped the consensus estimate of $6.7 billion by 4.9%. The reported figure also increased 7.9% year over year.
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