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Why Is KB Home (KBH) Down 24.3% Since Last Earnings Report?

A month has gone by since the last earnings report for KB Home (KBH). Shares have lost about 24.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is KB Home due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

KB Home Q3 Earnings Beat on Strong Demand

KB Home's third-quarter fiscal 2018 earnings not only surpassed the Zacks Consensus Estimate but also increased considerably year over year. The performance reflects a solid housing market despite rising interest rate woes.

Earnings & Revenue Discussion

Quarterly earnings of 87 cents per share outpaced the Zacks Consensus Estimate of 78 cents by 11.5% and increased 71% from 51 cents a year ago.

Total revenues of $1.22 billion, however, missed the consensus mark of $1.27 million. The top line improved 7.1% year over year on higher housing revenues.

Segment Details

Homebuilding Revenues: In the reported quarter, homebuilding revenues increased 7.1% to $1,221.9 million from the prior-year quarter, driven by an increase in the number of homes delivered. While land generated $2.3 million in revenues (down 33.3% from the year-ago quarter), housing revenues totaled $1,219.6 million (up 7.2%).

Net orders increased 3% to 2,685 homes, rising across the Central and Southeast regions, while net orders fell in West Coast and Southwest regions. Value of net orders, however, decreased 5% to $1.02 billion.

Number of homes delivered improved 8% from the year-ago level to 2,988 units. Deliveries increased in three regions, except West Coast. Average selling price fell a slight 0.8% to $408,200.

At the end of the reported quarter, average community count was 217, down 7% year over year.

The company's backlog totaled 5,484 homes (as of Aug 31, 2018), up 0.5% from a year ago. Potential housing revenues from backlog decreased 4% to $2.04 billion.

Margins

Adjusted housing gross profit margin (a metric that excludes the amortization of previously capitalized interest and inventory-related charges) expanded 140 basis points (bps) year over year to 23.1%.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) were 9.4%, up 20 bps from the year-ago figure.

Homebuilding operating margin increased 190 bps on a year-over-year basis, primarily driven by continued improvement in its housing gross margin.

Financial Services revenues grew 8% year over year to $3.5 million.

Financial Position

KB Home had homebuilding cash and cash equivalents of $354.4 million as of Aug 31, 2018, lower than $720.6 million as of Nov 30, 2017. Inventories were $3.7 billion, up from $3.3 billion as of Nov 30, 2017. KB Home had total liquidity of $816.7 million at the end of the quarter.

Net cash used in operating activities was $49.5 million in the first nine months of fiscal 2018 compared with $103.3 million of net cash provided by operating activities a year ago.

The ratio of debt to capital was 50.6% (up 410 bps) as of Aug 31, 2018, while that of net debt to capital was 45.9%, which is within the company's 2019 targeted range under its Returns-Focused Growth Plan.

Fourth-Quarter Guidance

KB Home expects housing revenues between $1.39 billion and $1.45 billion and ASP of around $400,000-$405,000. Meanwhile, SG&A ratio is projected to be 8.8-9.2%. Average community count is expected to be flat with the year-ago level of 228.

The company expects housing gross margin (assuming no inventory-related charges) to be18.3-18.7%.

Homebuilding operating margin (excluding impact of any inventory-related charges) is expected to be 9.3-9.7%.

Fiscal 2018 Guidance Revised

KB Home now expects housing revenues of approximately $4.6 billion, which is at the low end of its previous guided range of $4.6-$4.8 billion. Average community count is now anticipated to be up 4% year over year.

The company expects housing gross margin (excluding inventory-related charges) at the high end of the earlier guided range of 17.6-18%, reflecting an improvement of 110 bps. SG&A ratio will now likely be around 9.8% versus 8.8-9.2% expected earlier.

Homebuilding operating margin is now expected at around 8.2%, which is at the high end of the previously projected range of 7.7-8.2%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, KB Home has an average Growth Score of C, 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 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

KB Home has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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