Overall Assessment
I am neutral on KB Home (KBH). The KB Home Q2 2021 earnings report delivered strong results. Management was bullish, confident and even raised guidance. Yet, investors sold off the stock to the tune of a 6.7% loss. Clearly expectations were riding high. For example, KBH was one of the first home builders to reveal that it would not try to lean into the raging hot demand in the housing market: “we are assuming a lower monthly absorption in our underwriting as compared to our current pace and no inflation either in ASP or costs. In addition, we’re pursuing moderately sized deals in our preferred sub-markets…” Even though management indicated a similar strategy in the previous quarter, investors were disappointed. Moreover, KBH reported a “slippage” in community count partially as a result of selling out faster than anticipated…and apparently missing out on selling inventory at higher prices.
Once again, KBH reported problems with municipal delays. While more and more home builders reported similar issues, these operational obstacles are a recurring theme with KB Homes. As a result of the delays, deliveries were at the low end of KBH’s range. The company shifted delayed deliveries into Q3.
So, two months later, KBH has filled the post-earnings gap down twice but still cannot push past the gap. The company reported earnings into an increasing recognition that the housing boom was cooling.
Stock Performance
- One day after reporting Q2 earnings: -6.7%
- From the close after Q1 earnings to the close before Q2 earnings: -2.3%
- From the close after Q2 2020 earnings to the close before Q2 2021 earnings: 47.6%
- For the year until the close before earnings: +29.4%; compare to +21.6% for the iShares Dow Jones US Home Construction ETF (ITB)
KBH technicals are clearly improving. The confirmation of 50DMA support is another positive sign as the stock continues to recover from the June post-earnings gap down. A breakout above the August high would be very bullish even if it happens ahead of the start of the seasonally strong period for home builders.
Valuation (from Yahoo Finance)
- 12-month trailing P/E: 9.7
- 12-month forward P/E: 6.3
- Price/book: 1.5
- Price/sales: 0.9
- Short % of float: 5.7%
Year-Over-Year Performance (3 months ended May 31, 2021 and quarter-ending values)
- Total revenue: +58%
- Home deliveries: +40%
- Average selling price: +13%
- Homebuilding operating income: +216%
- Homebuilding operating income margin excluding various charges: from 6.9% up to 11.3%
- Housing gross profit margin: from 17.1% to 17.2%
- Adjusted housing gross profit margin: 18.7% to 21.5%
- Net income per diluted share: +173%
- Ending backlog value: +126%
- Cash and cash equivalents: +5.8%
- Ratio of net debt to capital: from 32.4% to 28.3%
Year-Over-Year Performance (6 months ended May 31, 2021)
- Total revenue: -7.1%
- Home deliveries: 0%
- Average selling price: -7%
- Homebuilding operating income: -29.4%
- Net income per diluted share: from -$0.16 to +$0.82
Year-Over-Year Guidance and targets
- Community count for the year: +10% to +15%
- Housing revenues, 3Q: -10.0% to -3.4%
- Housing revenues, full year: -1.8% to +1.5%
- ASP, 3Q: -3.2% to -2.0%
- ASP, full year: -3.6% to -1.1%
- Home building operating margin: from 8.6% to a range of 6.7% to 7.3% (assuming this is not excluding inventory-related charges)
- Housing gross profit margin excluding inventory-related charges, 3Q: from 18.7% to a range of 17.9% to 18.5%
- Housing gross profit margin excluding inventory-related charges, full year: from 18.1% to a range of 17.9% to 18.5%
Highlights from the Earnings Call
General Guidance
Management spent a significant amount of time on guidance. The numbers were very comprehensive. Accordingly, management expressed confidence in its ability to forecast and hit its numbers. Net orders and a robust backlog supported management’s confidence. For 2022, KBH remains “…on track for double-digit year-over-year community count growth. As we prepare for the significant acceleration of new community openings over the next six quarters…” The company anticipates sequential quarter-by-quarter growth in community count.
Market Conditions and Characteristics of Demand
- Buyers still want larger homes despite soaring prices: “we offer floor plans below 1600 square feet in over 75% of our communities, buyers are still selecting homes averaging 2100 feet, which is consistent with their choices over the past couple of years.”
- Accordingly, KB Homes is “not seeing any indication that affordability is stressed.”
- Net orders of 43,000 produced KB Homes’ best quarter since 2007.
- “Almost 95% of the homes in production are already sold and we remain committed to our build-to-order business model.”
Pricing Strategy
KB Homes indicated that it can absorb some price increases and would not include price “escalators” in contracts with customers. Fortunately, a plunge in lumber prices helped KBH’s cost structure.
The company also revealed its pricing strategy in discussing its entry into the Boise, Idaho housing market where it claimed no one is operating. “We’re targeting affordability and approaching it a little bit different than a lot of local builders who have moved up scale in their footage and moved up in their pricing and are chasing price. We’re coming in underneath.”
Earnings sources
- 2021 2nd quarter results: June 23, 2021
- 2021 1st quarter results: March 24, 2021
- 2020 2nd quarter results: June 24, 2020
- Seeking Alpha Transcripts: KB Home (KBH) CEO Jeff Mezger on Q2 2021 Results – Earnings Call Transcript
Be careful out there!
Full disclosure: no positions