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Why Is KB Home (KBH) Down 8.8% Since Its Last Earnings Report?

It has been about a month since the last earnings report for KB HomeKBH . Shares have lost about 8.8% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is KBH due for a breakout? 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 catalysts.

First-Quarter Fiscal 2018 Results

KB Home's quarterly adjusted earnings of 40 cents per share outpaced the Zacks Consensus Estimate of 30 cents by 33.3% and surged 116.7% from 15 cents in the year-ago quarter.

Total revenues of $871.6 million missed the consensus mark of $887 million. The top line, however, improved 6% year over year, driven by higher housing revenues.

Segment Details

Homebuilding Revenues : In the reported quarter, homebuilding revenues rose 6.5% from the prior-year quarter to $869.2 million, driven by an increase in the number of homes delivered and average selling price or ASP. While land generated $2.7 million in revenues (down 49.7% from the year-ago quarter), housing revenues were $866.5 million (up 6.9%).

Net orders improved 8% to 2,784 homes. Value of net orders increased 8% to $1.17 billion.

Number of homes delivered were unchanged from the year-ago quarter's level at 2,223 units. Deliveries increased in the Southwest, while it declined in the other three regions. Average selling price went up 7% to $389,800.

At the end of the reported quarter, average community count was 222, down 7% year over year.

The company's backlog totaled 4,972 homes (as of Feb 28, 2018), up 4% from the year-ago quarter. Potential housing revenues from backlog increased 10% to $1.97 billion. Although the Southwest and Southeast regions registered gains, backlog fell in West Coast and Central.

Margins

Adjusted housing gross profit margin (a metric that excludes the amortization of previously capitalized interest and inventory-related charges) expanded 150 bps year over year to 21.4%.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) were 11%, down 50 bps from the year-ago quarter. This marks a record low first-quarter ratio in the company's history.

Financial Services : Financial Services' revenues grew 2.9% year over year to $2.4 million.

Financial Position

KB Home had homebuilding cash and cash equivalents of $560.3 million as of Feb 28, 2018, lower than $720.6 million as of Nov 30, 2017. Inventories were $3.4 billion, up from $3.3 billion as of Nov 30, 2017.

Net cash used in operating activities was $141.7 million in fiscal first quarter, compared with $77 million a year ago.

The ratio of debt to capital was 56.0% as of Feb 28, 2018, while net debt to capital was 49.3%, which is within the company's 2019 target range under its Returns-Focused Growth Plan.

Second-Quarter Guidance

KB Home expects housing revenues between $990 million and $1.05 billion and ASP of around $400,000-$405,000. Meanwhile, SG&A ratio is projected in the range of 10.6-11.1%. Average community count is anticipated to be down mid-single digits versus 238 communities in the second quarter of 2017.

The company expects second-quarter housing gross profit margin in the range of 16.8-17.2% (16-16.5% expected earlier).

Adjusted operating margin (excluding the impact of any inventory-related charges) is expected in the band of 5.9-6.4%.

Fiscal 2018 Guidance

KB Home has narrowed its housing revenue guided range to $4.55-$4.85 billion from prior expectation of $4.5-$4.9 billion. The company has increased its ASP projection to the range of $400,000-$410,000, from earlier expectation of $395,000-$405,000. Average community count is now anticipated between flat and 5% down year over year.

The company boosted its housing gross profit margin (excluding inventory-related charges) expectation to the range of 17.4-17.9% (earlier it was 17.2-17.7%), reflecting an improvement of 50-100 bps. SG&A ratio will likely be around 9.7-10%, approximately flat from fiscal 2017 level.

Adjusted operating margin is now expected to be in the range of 7.4-8% (from prior 7.2-7.7%).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to three lower.

KB Home Price and Consensus

KB Home Price and Consensus | KB Home Quote

VGM Scores

At this time, KBH has a poor Growth Score of F. Its Momentum is doing a lot better with an A. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Our style scores indicate that the stock is more suitable for momentum investors than value investors.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, KBH has a Zacks Rank #1 (Strong Buy). We expect an above average 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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