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KB Home's (KBH) Shares Jump More Than 2% on Q1 Earnings Beat

Zacks Equity Research

KB Home’s KBH shares gained 2.4% in yesterday’s after-hour trading, after the homebuilder beat earnings expectations in the first quarter of fiscal 2019 despite reporting lower revenues. Continued progress with the Returns-Focused Growth plan drove the gross margin in the quarter.

The company highlighted that although its housing revenues, SG&A expenses ratio, and operating income suffered in the quarter due to lower net order and backlog value in the second half of 2018, its picture is relatively bright for the rest of 2019.

KB Home believes stable interest rates, stronger demand from increased consumer confidence, community growth and smaller floor plans for home buyers addressing affordability concerns are likely to drive growth through 2019.

Earnings & Revenue Discussion

Quarterly earnings of 31 cents per share outpaced the Zacks Consensus Estimate of 27 cents by 14.8% but declined 22.5% from 40 cents a year ago.

Total revenues of $811.5 million, however, missed the consensus mark of $829.3 million. The top line also declined 6.9% year over year, mainly due to lower average selling price (“ASP”) of homes delivered. The decline in net orders during the fourth quarter of 2018 impacted its first-quarter housing revenues.

KB Home Price, Consensus and EPS Surprise

KB Home Price, Consensus and EPS Surprise | KB Home Quote

Segment Details

Homebuilding Revenues: In the reported quarter, the segment's revenues fell 7% to $808.8 million from the prior-year quarter due to lower ASP of homes delivered. While land generated $10.6 million in revenues (up more than 298% from the year-ago quarter), housing revenues totaled $798.2 million (down 7.9%).

Net orders dropped 3.9% to 2,675 homes, declining across all regions served by the company (barring Southeast region). Value of net orders fell 12.9% to $1,022.1 million.

Number of homes delivered declined 3.2% from the year-ago level to 2,152 units. Deliveries increased in two regions (Central and Southeast). ASP fell 4.8% to $370,900 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 244, up 10% year over year.

The company’s backlog totaled 4,631 homes (as of Feb 28, 2019), down 6.9% from a year ago. Potential housing revenues from backlog declined 16% to $1.66 billion.

Margins

Housing gross margin increased 100 basis points (bps) year over year to 17.1% 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 10 bps year over year to 21.3%.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) were 13.4%, up 240 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 120 bps on a year-over-year basis to 3.9%. After adjusting for inventory-related charges, operating margin came in at 4.3%, down 130 bps.

Financial Services revenues grew 11.5% year over year to $2.7 million.

Financial Position

KB Home had homebuilding cash and cash equivalents of $511.7 million as of Feb 28, 2019, lower than $574.4 million on Nov 30, 2018. Inventories were $3,683.8 million, up from $3,582.8 million as of Nov 30, 2018. KB Home had total liquidity of $978.5 million at the end of the quarter.

In the quarter under review, KB Home used $198.2 million of net operating cash flow, mainly for investments in inventories.

The company spent nearly $384.2 million on land acquisitions and development in the quarter, with 49% of the total being alloted for new land acquisitions.

Its debt-to-capital ratio was 50.9% (up 120 bps) as of Feb 28, 2019. Net debt to capital was 44.3% (reflecting a 270-bps improvement) in 2018, within its target range of 35% to 45% for 2019 under Returns-Focused Growth Plan.

Q2 Guidance

KB Home expects second-quarter absorption rate to be equivalent to the second quarter of 2017 given the current market conditions. The company expects to open more than 35 new communities. It anticipates average community count to rise 15% to 20%. For fiscal 2019, it expects 10% to 15% growth in average community count.

KB Home estimates housing revenues between $900 million and $950 million, and ASP of around $375,000-$380,000. Meanwhile, SG&A ratio is projected in the range of 12.3-12.9%.

The company guides housing gross margin (assuming no inventory-related charges) in the band of 17-17.6%.

Homebuilding operating margin (excluding impact of any inventory-related charges) is expected within 4.2-5.2%.

Effective tax rate is estimated at 26%.

Zacks Rank & Other Key Picks

Currently, KB Home carries a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the Zacks Construction sector include Apergy Corporation APY, Quanta Services, Inc. PWR and United Rentals, Inc. URI. While Apergy and Quanta Services sport a Zacks Rank #1 (Strong Buy), United Rentals carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Apergy surpassed earnings estimates in three of the trailing four quarters, the average positive surprise being 9.4%.

Quanta Services and United Rentals are expected to witness 25.3% and 18.8% earnings per share growth in 2019, respectively.

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