KB Home: Yet Another Post-Earnings Fade for A Home Builder
“KB Home shares jump on third quarter earnings” – such is the kind of quick trigger post earnings headline that consistently fails for home builders. KB Home (KBH) opened higher by 5.7% but was all downhill from there. At the close, KBH lost 3.1% on the day in a major reversal. This close was a vast improvement on a loss which reached 6.4% at the intraday low. Bottom-fishers were not able to push the stock back over its declining 50-day moving average (DMA).
In her reporting, Diana Olick, CNBC’s housing market reporter, pointed to a red flag in a 26% cancellation rare; most home builders are “in the teens.” KBH did not address this high cancellation rate and analysts did not ask about it either (Seeking Alpha Transcript). However, this rate was only up by one percentage point year-over-year; KBH simply tends to have a high cancellation rate.
As usual, KBH reported generally strong results. From the earnings slide presentation and the earnings release (percentage changes on a year-over-year basis):
Housing Revenues: +7%
Net income: +74%
Earnings per diluted share: +71%
Operating income: +38%
Adjusted housing gross profit margin: +140 basis points
Deliveries: +8%
Average Selling Price: -1%
Net Order Value: -5%
Net Orders: +3%
Backlog Value: -4%
Ending Community Count: -3%
Average Community Count: -7%
Absorption (net orders per community, per month): 11%
During the conference call, KBH summarized its guidance in strong terms:
“…a solid outlook for the fourth quarter, we expect a meaningful improvement in our book value by the end of this year. We are poised to finish 2018 with growth in revenues and a significantly higher year-over-year operating margin fueled primarily by the expansion of our gross margin, a key goal for us. As we look ahead to 2019, the combination of community count growth beginning in the fourth quarter of this year, a substantial increase in communities slated to open in 2019, and maintaining our solid absorption pace gives us confidence in achieving our targets next year.”
Still, investors likely found reasons to nitpick and sell in the details. KBH lowered metrics on average selling price and revenue (emphasis mine):
“Our $2 billion backlog provides visibility on deliveries for the remainder of this year, supporting our 2018 expectations including housing revenues that are at the low end of our previous guidance range. Although we are pleased with our year-over-year absorption pace increase in the third quarter, we now recognize in retrospect that our full year revenue guidance from last quarter was too aggressive based on the timing of getting our communities open and establishing our targeted pace to support projected fourth-quarter deliveries.
In addition, with our backlog currently weighted outside of California, we’re lowering our ASP expectations from our previous guidance, reflecting our third quarter backlog ASP that is down 4% year-over-year, which will also impact our revenues. Managing the business for the balance of 2018, we made the decision to maintain our pace price discipline and achieve a higher gross margin for this year as opposed to running our communities at a faster pace to preserve delivery volumes.
As a result, we’re now expecting a gross margin of approximately 18% for this year at the high end of our previous guidance range.”
Net-net, it was yet another fade for post-earnings action for a major home builder. The impact rippled throughout the sector. Toll Brothers (TOL) finished reversing all its post-earnings gains with a 2.5% loss on the day. Lennar (LEN) lost 2.0% with a 19-month closing low. The iShares US Home Construction ETF (ITB) lost 1.4% to close exactly at a 52-week low.
This month’s round of housing data have not improved the outlook for the housing market. I will cover this and more in my next Housing Market Review. It looks like time is running out on a good start for the seasonally strong period for home builders!
Be careful out there!
Full disclosure: long ITB call options
In her reporting, Diana Olick, CNBC’s housing market reporter, pointed to a red flag in a 26% cancellation rare; most home builders are “in the teens.” KBH did not address this high cancellation rate and analysts did not ask about it either (Seeking Alpha Transcript). However, this rate was only up by one percentage point year-over-year; KBH simply tends to have a high cancellation rate.
As usual, KBH reported generally strong results. From the earnings slide presentation and the earnings release (percentage changes on a year-over-year basis):
Housing Revenues: +7%
Net income: +74%
Earnings per diluted share: +71%
Operating income: +38%
Adjusted housing gross profit margin: +140 basis points
Deliveries: +8%
Average Selling Price: -1%
Net Order Value: -5%
Net Orders: +3%
Backlog Value: -4%
Ending Community Count: -3%
Average Community Count: -7%
Absorption (net orders per community, per month): 11%
During the conference call, KBH summarized its guidance in strong terms:
“…a solid outlook for the fourth quarter, we expect a meaningful improvement in our book value by the end of this year. We are poised to finish 2018 with growth in revenues and a significantly higher year-over-year operating margin fueled primarily by the expansion of our gross margin, a key goal for us. As we look ahead to 2019, the combination of community count growth beginning in the fourth quarter of this year, a substantial increase in communities slated to open in 2019, and maintaining our solid absorption pace gives us confidence in achieving our targets next year.”
Still, investors likely found reasons to nitpick and sell in the details. KBH lowered metrics on average selling price and revenue (emphasis mine):
“Our $2 billion backlog provides visibility on deliveries for the remainder of this year, supporting our 2018 expectations including housing revenues that are at the low end of our previous guidance range. Although we are pleased with our year-over-year absorption pace increase in the third quarter, we now recognize in retrospect that our full year revenue guidance from last quarter was too aggressive based on the timing of getting our communities open and establishing our targeted pace to support projected fourth-quarter deliveries.
In addition, with our backlog currently weighted outside of California, we’re lowering our ASP expectations from our previous guidance, reflecting our third quarter backlog ASP that is down 4% year-over-year, which will also impact our revenues. Managing the business for the balance of 2018, we made the decision to maintain our pace price discipline and achieve a higher gross margin for this year as opposed to running our communities at a faster pace to preserve delivery volumes.
As a result, we’re now expecting a gross margin of approximately 18% for this year at the high end of our previous guidance range.”
Net-net, it was yet another fade for post-earnings action for a major home builder. The impact rippled throughout the sector. Toll Brothers (TOL) finished reversing all its post-earnings gains with a 2.5% loss on the day. Lennar (LEN) lost 2.0% with a 19-month closing low. The iShares US Home Construction ETF (ITB) lost 1.4% to close exactly at a 52-week low.
This month’s round of housing data have not improved the outlook for the housing market. I will cover this and more in my next Housing Market Review. It looks like time is running out on a good start for the seasonally strong period for home builders!
Be careful out there!
Full disclosure: long ITB call options
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