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KB Home's (KBH) Shares Jump More Than 3% on Q4 Earnings Beat

Zacks Equity Research

KB Home’s KBH shares have gained 3.8% in yesterday’s after-hour trading, after the homebuilder beat earnings expectation in the fourth quarter of fiscal 2018, despite reporting lower revenues.

Earnings & Revenue Discussion

Quarterly earnings of 96 cents per share outpaced the Zacks Consensus Estimate of 93 cents by 3.2% and also increased 14% from 84 cents a year ago.

Total revenues of $1.348 billion, however, missed the consensus mark of $1.350 billion. The top line also decreased 4% year over year, mainly due to lower average selling price (“ASP”) of homes delivered.

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 decreased 3.9% to $1.344 billion from the prior-year quarter, thanks to lower ASP of homes delivered. While land generated $4.7 million in revenues (down 40.7% from the year-ago quarter), housing revenues totaled $1.339 billion (down 3.7%).

Net orders decreased 12.3% to 2,013 homes, declining across the regions served by the company (barring Southeast region). Value of net orders, however, decreased 21.1% to $738.3 million.

Number of homes delivered improved only 1.5% from the year-ago level to 3,389 units. Deliveries increased in two regions (Southwest and Southeast). Average selling price fell 5% to $395,200, mainly due to a shift in geographic mix of homes delivered.

At the end of the reported quarter, average community count was 232, up 2% year over year.

The company’s backlog totaled 4,108 homes (as of Nov 30, 2018), down 6.9% from a year ago. Potential housing revenues from backlog decreased 14% to $1.43 billion.

Margins

Adjusted housing gross profit margin (a metric that excludes the amortization of previously capitalized interest and inventory-related charges) contracted 70 basis points (bps) year over year to 22.8%.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) were 9%, up 30 bps from the year-ago figure. This upside was mainly due to higher marketing expenses to support new community openings during the quarter and in 2019.

Homebuilding operating margin decreased 30 bps on a year-over-year basis to 9.1%. After adjusting for inventory-related charges, operating margin came in at 9.7%, down 20 bps.

Financial Services revenues grew 14.8% year over year to $4.6 million.

Financial Position

KB Home had homebuilding cash and cash equivalents of $574.4 million as of Nov 30, 2018, lower than $720.6 million on Nov 30, 2017. Inventories were $3.6 billion, up from $3.3 billion as of Nov 30, 2017. KB Home had total liquidity of $1.05 billion at the end of the quarter.

In 2018, KB Home generated $222 million of net operating cash flow after investing nearly $1.9 billion in land acquisitions and development.

Its debt-to-capital ratio was 49.7% (up 500 bps) as of Nov 30, 2018. Net debt to capital was 41.6% (reflecting a 380-bps improvement) in 2018, marking the lowest year-end net leverage ratio since 2007.

Fiscal 2018 Highlights

KB Home’s earnings came in at $1.71, reflecting a decrease from $1.85 per share earned in the year-ago period. The company’s total revenues were $4.55 billion, up 4% year over year. Deliveries increased 4% and ASP was slightly increased to $399,200 during the fiscal year.

The company’s adjusted operating margin (excluding inventory-related charges) expanded 120 bps year over year to 8.3%. SG&A expenses, as a percentage of housing revenues, were flat year over year at 9.8%.

First Quarter of Fiscal 2019 Guidance

KB Home expects housing revenues between $800 million and $860 million, and ASP of around $375,000-$385,000. Meanwhile, SG&A ratio is projected in the range of 12.7-13.5%. Average community count is expected to grow within 6-10%.

The company expects housing gross margin (assuming no inventory-related charges) in the range of 16.6-17.2%.

Homebuilding operating margin (excluding impact of any inventory-related charges) is expected within 3.4-4.4%.

Zacks Rank & Key Picks

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

Some better-ranked stocks in the Zacks Construction sector are KBR, Inc. KBR, Taylor Morrison Home Corporation TMHC and Altair Engineering Inc. ALTR. While KBR sports a Zacks Rank #1 (Strong Buy), Taylor Morrison and Altair Engineering both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KBR surpassed earnings estimates in three of the trailing four quarters, resulting in average positive surprise of 12.6%.

Taylor Morrison and Altair Engineering are expected to witness 14.8% and 70.8% EPS growth in 2019, respectively.

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