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KB Home (KBH) Stock Gains on Earnings & Revenue Beat in Q4

Zacks

KB Home KBH ended fiscal 2017 on an impressive note based on solid housing fundamentals. The homebuilder surpassed expectations in fourth-quarter fiscal 2017 on both top and bottom lines. Following the release, shares of the company gained 3.4% in the after-hour trading session on Jan 10.

Quarterly earnings of 84 cents per share outpaced the Zacks Consensus Estimate of 77 cents by 9.1% and increased a significant 110% from 40 cents in the year-ago period.

Total revenues of $1.4 billion beat the Zacks Consensus Estimate of $1.36 million by 3.3%. The top line also improved 17.7% year over year, driven by higher housing revenues.

Segment Details

Homebuilding Revenues: In the reported quarter, homebuilding revenues increased 17.7% year over year to $1.39 billion, driven by an increase in the number of homes delivered and average selling price or ASP. While land generated $7.97 million in revenues (up 145.5% from the year-ago quarter), housing revenues came in at $1.39 billion (up 17.4%).

Net orders increased 2% to 2,296 homes, increasing across the board. Value of net orders increased 9% to $935.4 million.

Number of homes delivered jumped 9% to 3,340 homes. Deliveries increased in each of the company’s regions, barring Southeast. Average selling price went up 7.5% to $416,500.

At the end of the reported quarter, average community count was 228, slightly down from 231 in the year-ago period.

The company’s backlog totaled 4,411 homes (as of Nov 30, 2017), roughly flat year over year. Potential housing revenues from backlog increased 9% to $1.66 billion, with all the regions registering gains, except Southeast and Central.

Margins

Adjusted housing gross profit margin (a metric that excludes the amortization of previously capitalized interest and inventory-related charges) expanded 190 basis points (bps) year over year to 23.5%.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) were 8.7%, reflecting an increase of 50 bps year over year. This marks a record low fourth-quarter ratio in the company's history.

Financial Services: Financial Services’ revenues grew 20% year over year to $3.98 million.

Fiscal 2017 Highlights

KB Home’s earnings came in at $1.85 per share, reflecting an increase of 65.2% year over year. The company’s total revenues were $4.4 billion, up 21.5% year over year. Deliveries increased 11% and ASP was up 9% in the year. The company ended the year with 224 communities, down 5% from a year ago.

The company’s adjusted operating margin (excluding inventory-related charges) expanded 140 bps year over year to 7.1%. SG&A expenses, as a percentage of housing revenues, improved 110 bps to 9.8%.

Financial Position

KB Home had homebuilding cash and cash equivalents of $720.6 million as of Nov 30, 2017, lower than $592.1 million as of Nov 30, 2016. Inventories were $3.3 billion, down from $3.4 billion as of Nov 30, 2016.

Net cash provided by operating activities increased 172% to $513.2 million in fiscal 2017 from the year-ago level.

Net debt was $1.6 billion as of Nov 30, 2017, compared with $2.05 billion as of Nov 30, 2016. This reflects a net debt-to-capitalization ratio of 45.4% in the year, lower than 54.3% at the end of 2016.

First-Quarter Guidance

KB Home expects housing revenues between $840 million and $880 million, ASP of around $387,000-$392,000. Meanwhile, SG&A ratio will likely be in the range of 11.7-12%.

The company expects first-quarter housing gross profit margin in the range of 16-16.5%. This reflects a typical, seasonal first quarter decrease in operating leverage from lower revenues. However, on a year-over-year basis, the guidance reflects 90 bps to 140 bps improvement.

Adjusted operating margin is expected to be in the range of 4.3-4.7%.

Fiscal 2018 Guidance

KB Home expects housing revenues to be in the range of $4.5 billion to $4.9 billion. ASP is expected in the range of $395,000-$405,000. Average community count is anticipated to remain relatively flat compared with fiscal 2017.

The company expects housing gross profit margin in the range of 17.2% to 17.7%, reflecting an improvement of 30 bps to 80 bps. SG&A ratio will likely be around 9.7% to 10%, approximately flat from fiscal 2017 level.

Adjusted operating margin is expected to be in the range of 7.2% to 7.7%.

KB Home Price, Consensus and EPS Surprise

KB Home Price, Consensus and EPS Surprise | KB Home Quote


Peer Release

Lennar Corporation’s LEN fourth-quarter fiscal 2017 adjusted earnings of $1.29 per share fell shy of the Zacks Consensus Estimate of $1.50 by 14% and decreased 1.5% from the year-ago level of $1.31. Nonetheless, total revenues of $3.79 billion beat the Zacks Consensus Estimate of $3.62 billion by 4.5%.

Zacks Rank & Other Key Picks

KB Home currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

A few other top-ranked stocks in the construction sector are D.R. Horton, Inc. DHI, sporting a Zacks Rank #1, and NVR Inc. NVR, carrying a Zacks Rank #2 (Buy).

D.R. Horton is likely to witness a 24.8% increase in fiscal 2018 earnings.

NVR is expected to witness 20.6% growth in 2018 earnings.

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