) reported mixed third-quarter fiscal 2013 results, beating the
Zacks Consensus Estimate for earnings but missing the same for
revenues due to weak net orders; likely a result of recent
interest rate spike.
KB Home's adjusted earnings (excluding income tax benefit) of
28 cents per share in the third quarter were a huge improvement
over the year-ago adjusted loss of 10 cents per share (also
included an income tax benefit). Earnings also beat the Zacks
Consensus Estimate of 20 cents by 40% as price increases and
margin improvements/cost discipline made up for the soft revenues
and orders in the quarter.
Including the income tax benefit, earnings stood at 30 cents
per share, up significantly from a gain of 4 cents reported in
the year-ago quarter.
Total revenue increased 29% from the year-ago quarter to
$549.0 million in the third quarter of 2013. However, revenues
missed the Zacks Consensus Estimate of $571 million by around 4%
due to net order decline.
Revenues and Margins
Housing revenues increased 29.5% year over year to $545.8
million driven by increased pricing power which made for the
moderating order growth.
The number of homes delivered increased 6% from the year-ago
quarter to 1,825 homes.
Average selling prices (ASP) rose 22% year over year to
$299,100, driven by gradually rising home prices. In addition, a
shift in buyer mix to more experienced buyers who prefer
larger/more upgraded homes and strategic community positioning to
higher priced communities also pulled up ASPs. An intentional
shift in deliveries in California region to higher-priced coastal
areas added to the pricing gains.
Increased affordability, higher rentals and historically-low
interest rates are boosting demand. Supply however, remains
limited by low home inventories, both for new and existing homes.
A shortage of land and labor is restricting production of homes,
both single- and multi-family. Home prices are thus moving up
sharply with the market demand gaining momentum and supply
The company's backlog totaled 3,039 homes as of Aug 31, 2013,
down 3% year over year, due to a net order decline. Potential
housing revenues from backlog rose 9% to $808.5 million.
Net Orders Decline
Net orders declined 9% in the quarter to 1,736 homes. Net
order growth was significantly below second quarter's 6% and
first quarter's 40% growth. As a percentage of gross orders, the
company's cancellation rate was 33%, much higher than last
quarter's 27% as well as year-ago quarter's 29%. The value of net
orders grew 7% to $528.9 million, better than the decline seen in
net order units due to higher selling prices.
We believe that the recent increase in interest/mortgage rates
has slowed order pace and traffic. With the recent improvement in
economic conditions and the housing market in general, mortgage
rates are edging upwards to more normalized levels since May.
High interest rates dilute the demand for new homes, as mortgage
loans become expensive; thus lowering a buyer's purchasing power.
Accordingly, the sharp increase in interest rates shocked many
customers and a few put off their purchase decision; thus
increasing cancellation rates and lowering orders.
Moreover, in a scenario where home prices are continuously
rising, management is emphasizing more on price and margin
improvement to optimize returns from its land assets and slowing
down its sales pace. The reduced focus on sales pace also led to
the lower unit growth in the third quarter. We believe that
though this price optimization initiative is encouraging and has
boosted profits so far, KB Home needs to increase its volumes to
boost long-term growth.
However, management stated that the moderating order pace
caused by a spike in mortgage interest rates was a temporary
effect and demand should go up once consumers adjust to both
higher rates and pricing.
Margins Were Strong
Adjusted homebuilding gross margin improved 500 basis points
(bps) in the quarter to 19.3%, driven by price increases,
favorable community mix and improved operating efficiencies.
The selling, general & administrative (SG&A) expense
ratio improved 250 bps year over year to 11.6% in the quarter due
to the company's cost reduction initiatives.
Operating margin improved 400 bps year over year to 6.6%
driven by solid gross margin expansion and better operating
efficiencies emanating from KB Home's strategic actions. Higher
income associated with outstanding cash-settled equity-based
compensation awards also improved operating margin.
In addition to the strengthening housing market, KB Home's
strategic growth initiatives helped drive profitability in the
quarter. The company gained from its strategic shift to
higher-priced and better-located communities and also improving
and refining its products to meet consumer preferences. In
addition, KB Home's focus on pricing over sales pace also
increased margins significantly.
Outlook for Fiscal 2013
Despite the rising interest rates, KB Home expects further
meaningful profits in the fourth quarter on the back of its
strategic growth plans and strong housing fundamentals comprising
steady demand and constrained supply.
Its strong land position, significant financial flexibility,
increased community count, rising ASPs, solid backlog position
and increasing margins and SG&A leverage are expected to help
it to achieve its goals in the fourth quarter. The company
expects to see enhanced profitability and accelerated growth in
fiscal 2014 as well.
The company expects revenues to increase 40% in 2013. KB Home
intends to open more than 120 communities in 2013 as the current
land acquisition and development activities are converted into
open communities. It expects to grow its community count by 15%
in the fourth quarter of 2013 with many more scheduled for 2014.
The company expects its land investment to exceed $1.2 billion
for fiscal 2013 which will boost top-line growth.
Fourth Quarter Outlook
In the fourth quarter, KB Home expects gross margins to
improve sequentially. Average closing price is expected to be
greater than $300,000, while backlog conversion rate is expected
to be approximately 70% in the fourth quarter.
Other Stocks to Consider
KB Home carries aZacks Rank #3 (Hold). None of the major
homebuilding companies carry a positive Zacks Rank. Stocks in the
building products sector that are performing well include
CaesarStone Sdot-Yam Ltd.
). While PGTI and CSTE carry a Zacks Rank #1 (Strong Buy), MAS
carries a Zacks Rank #2 (Buy).
CAESAR STONE SD (CSTE): Free Stock Analysis
KB HOME (KBH): Free Stock Analysis Report
MASCO (MAS): Free Stock Analysis Report
PGT INC (PGTI): Free Stock Analysis Report
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