KB Home (NYSE:KBH) reported strong gross margins. Unfortunately, nothing else reported could be called “strong”. And shares fell sharply to test their 50-day moving average.
It was a comprehensive disappointment. Orders plummeted. Cancellations took off.
Both dynamics largely reflected “the Company's proactive efforts to assure a backlog of qualified home buyers amid the unprecedented nationwide economic and employment disruptions resulting from the pandemic". In other words, people were less inclined to make a major purchase, and of those to whom that statement doesn’t apply, the company was less likely to work with them without more assurances of qualified credit standing.
Naturally, these dynamics are a microcosm of the deflationary spiral potential inherent in our current macroeconomic situation. That said, this report could be a sign that KBH was detrimentally overly cautious (relative to peers) during the crash, which was probably an artifact of its “build to order” model.
Order were rough, but the company saw improvement dramatically accelerate in June to modestly positive on a year-over-year basis. Returning to modest growth in June is impressive and confirms what we already knew: the housing market is on fire since the pandemic.
All-time lows in mortgage rates plus a ton of fiscal stimulus and concerns about the currency will apparently do that.
But KB Home's order growth is lagging peers. The company saw modest growth, which compares to much stronger 20% June order growth from Lennar (LEN). Both KBH and Lennar guided down 2H in seemingly conservative fashion despite current strength given heightened uncertainty.
KBH -14% has a history of disappointing quarterly reports and failing to execute in step with its peers, which is exactly why the stock trades at book value, well under the industry standard multiple. That, once again, did not change this time around.
KB Home (NYSE:KBH) frames itself as a homebuilding company in the United States. It operates through four segments: West Coast, Southwest, Central, and Southeast.
The company builds and sells various homes, including attached and detached single-family residential homes, townhomes, and condominiums primarily for first-time, first move-up, second move-up, and active adult homebuyers.
It also offers financial services, such as insurance products and title services. It has operations in Arizona, California, Colorado, Florida, Nevada, North Carolina, Texas, and Washington.
Our KBH Earnings Summary:
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KB Home misses by $0.03, misses on revs.
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Reports Q2 (May) earnings of $0.55 per share, $0.03 worse than the S&P Capital IQ Consensus of $0.58; revenues fell 10.6% year/year to $913.97 mln vs the $1.08 bln S&P Capital IQ Consensus.
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Homes delivered were 2,499, compared to 2,768. Average selling price was $364,100, compared to $367,700.
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COVID Impact: The pandemic significantly impacted the business during Q2. Co experienced home delivery delays during most of the quarter. In addition, the co's order pace moderated significantly, and home purchase cancellations increased considerably. Among the markets with the largest impact in Q2 orders were the Inland Empire and Bay Area in California; Las Vegas, Nevada; Houston, Texas; and Orlando, Florida.
Our KBH Research and Conference Call Notes:
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Outlook: Over the past several weeks, conditions have started to improve. With restrictions easing, in the latter part of May, co began the process of more broadly opening its sales centers, model homes and design studios to the public. As the economy continues to recover from the severe impacts of the pandemic, co expects employment, consumer confidence and other fundamental housing factors to also improve. However, the speed, trajectory and strength of any such recovery remains highly uncertain, and it could be slowed or reversed by a number of factors. Company management is reinstating guidance and will provide its outlook for Q3 (Aug) and full year on the Company's earnings conference call.
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Co is encouraged by its ability to effectively resume nearly all of its core operations and the recent improvement in its gross orders, net orders and cancellation rate, which it believes is an indicator of underlying strength in the overall housing market and the resilience of the attractive markets in which it operates.
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Subsequent to the end of the quarter, the Company's business continued to rebound measurably, with gross orders and net orders increasing on both a year-over-year and sequential basis.
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On the call, KBH said it expects Q3 (Aug) housing revenues to be $820-880 mln and for the full year, housing revenues will range from $3.75-3.95 bln. Of note, this is not comparable to consensus which is for total revenue.
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In Q2 (May), the co's overall average selling price was down slightly year-over-year to approx $364,000. However, co expects an increased mix of deliveries from higher-priced communities will result in higher average selling prices in 2H20 relative to 1H20 and on a yr/yr basis.
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For Q3, KBH projects an overall average selling price in a range of $395,000 to $400,000. ASP for the full year should be in the $385,000-395,000 range.
