KB Home (KBH) Q1 Earnings Beat, Stock Up on Solid Deliveries

KB Home KBH reported impressive results in first-quarter fiscal 2020 (ended Feb 29, 2020). Earnings and revenues topped their respective Zacks Consensus Estimate, and registered notable improvement on a year-over-year basis.

Investors’ sentiments were uplifted post the earnings release, which prompted an increase of nearly 9% in its shares in the after-market trading session.

Jeffrey Mezger, the company’s chairman, president and chief executive officer, said, “While our performance in the first quarter was strong, with underlying market conditions that were robust, these results preceded the COVID-19 pandemic declaration, and we are now taking actions to adjust our business in this period of uncertainty.”

The company has curtailed land acquisition and development until the market conditions become more stabilized. Nonetheless, KB Home is well positioned even amid the current scenario, given strong balance sheet and liquidity of more than $1.2 billion.

Earnings & Revenue Discussion

The company reported quarterly earnings of 63 cents per share, outpacing the consensus estimate of 43 cents by 46.5%. On a further encouraging note, the metric more than doubled from the year-ago figure of 31 cents.

KB Home Price, Consensus and EPS Surprise

KB Home Price, Consensus and EPS Surprise

KB Home price-consensus-eps-surprise-chart | KB Home Quote

Total revenues of $1.08 billion also topped the consensus mark of $950.6 million by 13.2% and grew by a notable 33% year over year, mainly due to higher home deliveries and average selling price (ASP). This marked the company’s highest first-quarter revenues since 2007.

Segment Details

Homebuilding: In the quarter under review, the segment's revenues of $1.07 billion advanced 32.6% from the prior-year period. Under the homebuilding umbrella, land generated $0.6 million revenues (significantly down from $10.6 million a year ago), while housing revenues totaled $1,071.8 million (increasing 34.3% from the prior year).

Number of homes delivered increased 28% from the year-ago level to 2,752 units. Deliveries increased in all the four regions served (West Coast, Southwest, Central and Southeast). ASP also rose 5% from a year ago to $389,500.

At the end of the reported quarter, average community count was up marginally from a year ago to 250. Notably, net orders per community averaged 4.6 per month in the quarter, up from 3.7 recorded in the prior-year period.

Orders & Backlog

Net orders grew 31% from the prior-year quarter to 3,495 homes, increasing in all regions served by the company. Value of net orders also increased a whopping 35% from the year-ago quarter to $1.38 billion.

The company’s quarter-end backlog totaled 5,821 homes (as of Feb 29, 2020), up 26% from a year ago. Potential housing revenues from backlog grew 28% from the prior-year period to $2.12 billion. Both the metrics marked their highest first-quarter levels in the past 13 years.

Margins

Homebuilding operating margin (excluding inventory-related charges) improved 180 basis points (bps) to 5.6%.

Within homebuilding, housing gross margin (excluding inventory-related charges) improved 30 bps year over year. The increase was attributed to favorable impact of improved operating leverage owing to higher housing revenues and lower amortization of previously capitalized interest, partly offset by a mix shift of homes delivered.

Adjusted housing gross margin — which excludes inventory-related charges and the amortization of previously capitalized interest — registered a decline of 20 bps year over year to 21.1%.

As a percentage of housing revenues, selling, general and administrative expenses improved 160 bps from the year-ago figure.

Financial Services revenues grew 31.8% year over year to $3.55 million.

Financial Position

KB Home had cash and cash equivalents of $429.7 million as of Feb 29, 2020, lower than $453.8 million on Nov 30, 2019. Inventories marginally increased to $3.73 billion from $3.7 billion as of Nov 30, 2019.

Lots owned or under contract were 63,234, slightly down from fiscal 2019-end. Of these, 39,033 owned lots represented approximately 3.1 years’ supply, based on homes delivered in the trailing 12 months.

Its debt-to-capital ratio was 41.7% (which improved 60 bps from Nov 30, 2019). Net debt-to-capital ratio was 35.1% as of Feb 29, 2020.

Guidance

In view of widespread shutdowns in the wake of the coronavirus pandemic, KB Home has withdrawn its fiscal 2020 guidance for now. However, solid balance sheet and significant liquidity allow it to deliver homes and generate revenues, while working closely with its business partners and monitoring cash outflows in this evolving environment.

Zacks Rank

KB Home — which shares space with D.R. Horton, Inc. DHI and PulteGroup, Inc. PHM in the Zacks Building Products - Home Builders industry — currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Peer Release

Lennar Corporation LEN reported solid results in first-quarter fiscal 2020 (ended Feb 29, 2020). This marks the company’s fourth consecutive quarter of an earnings beat. The results mainly benefited from solid demand for new homes, depicting healthy housing market fundamentals.

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