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Why Is KB Home (KBH) Up 3.5% Since Last Earnings Report?

Zacks Equity Research
Briggs & Stratton (BGG) delivered earnings and revenue surprises of -48.48% and 1.54%, respectively, for the quarter ended March 2019. Do the numbers hold clues to what lies ahead for the stock?

A month has gone by since the last earnings report for KB Home (KBH). Shares have added about 3.5% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

KB Home's Q4 Earnings Beat Estimates

KB Home reported fourth-quarter fiscal 2018 results, wherein earnings surpassed the Zacks Consensus Estimate, while revenues missed the same.

Earnings & Revenue Discussion

Quarterly earnings of 96 cents per share outpaced the estimates 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.

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%. That said, housing gross margin, excluding inventory-related charges, improved 10 bps to 18.7%.

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.

Housing gross margin, excluding inventory-related charges, expanded 120 bps to 17.5%. Adjusted housing gross margin, excluding inventory-related charges and the amortization of previously capitalized interest, contracted 70 bps to 22.5% compared to prior 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%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -7.27% due to these changes.

VGM Scores

Currently, KB Home has a nice Growth Score of B, 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 quintile 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise KB Home has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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