KB Homes Misses Overeager Estimates
KB Homes (KBH) certainly disappointed the market today. With the housing data so robust and Lennar’s (LEN) results to foreshadow the release KB Homes was not expected to fall shy of consensus. Lennar beat on the top and bottom lines, provided a positive outlook for cash-flow growth, and raised its dividend 212%, surely the best-in-breed KB Homes can do the same?
But perhaps that was the problem to begin with, the consensus estimate. Maybe it was too high. With the housing data so robust the average analyst rating for housing turned to a buy over the past quarter and with it came a number of upgrades for KB Homes. If it has happened once it has happened a thousand times, the market got ahead of itself and now the stock's price is readjusting to reality.
KB Homes Delivered A Good Report
The actual results were not bad, not bad at all. Certainly not bad enough for shares to be trading -3.5%. Revenue missed consensus by 2.5% but still posted a whopping 15.6% increase over last year. EPS didn’t miss, GAAP EPS of $1.31 came in $0.02 above consensus proving the companies ability to make money.
The EPS result was driven in large part by an increase in margins. Gross margins improved 120 basis points from the previous year due to a reduction in interest amortization. Because the company is able to generate free-cash-flow, and cash flow is improving, we can expect management to continue improving the balance sheet and driving earnings this year.
CEO Jeffrey Mezger
“With the conclusion of the third year of this Plan, our 2019 results reflect incredibly strong progress relative to 2016 when we launched the Plan and set the stage for the new year. We have begun 2020 on sound footing, with a 26% year-over-year increase in our backlog value to $1.8 billion, and the composition of both our backlog and community portfolio reflecting higher margins. As such, we believe we are well-positioned to further expand our profitability this year and meaningfully grow our return on equity.”
Prices Are Down But Traffic Is Up
The average selling price per home is down from last year but the volume of sales and growing backlog make up the difference. The total number of new orders grew 38% from last year and, based on the home builders sentiment data, the pace of traffic is not expected to slow in 2020. The pace of new home sales growth is expected to top 11% in 2020 and those estimates may be low. Pent up demand and lower prices have unlocked a wave of activity that may not soon be assuaged.
The decline in the average sales price is likely due to the sales mix. KB reports successfully raising prices in 65% of its communities which makes the decline in average sales price less a problem than it might seem. The value of backlogged orders grew at a faster rate than the number of orders, evidence of those higher prices, and points to an increase in average sales price later in the year.
Regarding the data, the Building Permits is the most robust. Building permits are a leading indicator of the housing market and up more than 15% from the low set earlier this year. At 918,000 annualized units, permits are sitting at a multi-year high and suggest a surge in home building is coming this spring.
The Technical Outlook: A Buying Opportunity Is At Hand
Shares of KB Homes gave up more than -3.5% in today’s session but the deepest losses were recovered. The stock fell to find support at the $35 level and above the 30-day EMA. At this level price action appears to be well-supported and the indicators are bullish if in retreat. Price action may continue to test support in the near-term, a move back to or even below the EMA is not unlikely, so caution is recommended when considering new entries.
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