KB Home (KBH) announced that it would release its results for the first quarter of fiscal 2011 before the market opens on April 05, 2011. Los Angeles-based KB Home earned a profit of 24 cents in the fourth quarter, comprehensively beating the Zacks Consensus Estimate of a loss of 16 cents.
In the upcoming quarter, the Zacks Consensus Estimate for KB Home is pegged at a loss of 27 cents per share, reflecting an annualized decline of 61%. The downside potential of the estimate, essentially a proxy for future earnings surprises, is just 4%.
With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 57%, with mixed experiences in the last four quarters. The last two quarters recorded positive surprises while the first two saw negative surprises.
Fourth Quarter Review
KB Home reported a net income of $17.4 million or 23 cents per share in its fourth quarter ended November 30, 2010, including inventory impairment and land option contract abandonment charges of $3.2 million and an income tax benefit of $2.0 million.
The performance deteriorated significantly from last year’s income of $100.7 million or $1.31, including inventory impairment and land option contract abandonment charges of $77.2 million and an income tax benefit of $191.7 million. The year-over-year drop was attributable to lower housing and land sale revenues, partly offset by higher margins and lower selling, general and administrative expenses.
Revenues too declined 33% to $451 million driven by poor performance in housing. Housing revenues fell 28% to $446 million reflecting a 37% decrease to 1918 units in the number of homes delivered, partly offset by a 14% increase in the average selling price to $232,500.
The Financial Services business also recorded a 4% drop in revenues to $3 million.
However, the company showed much improvement in terms of expenses. Selling, general and administrative (SG&A) expenses declined 35% year over year to $29.7 million resulting from cost-saving initiatives adopted by the company and also from a lower number of homes delivered.
Operating income at KB Home’s homebuilding business was $29.1 million compared with the prior-year loss of $81.5 million. The improvement was ascribed to a higher housing gross margin, reduced SG&A expenses, lower asset impairment and land option contract abandonment charges, and decreased losses from land sales.
Estimate Revisions Trend
The first quarter 2011 estimate has shown an improving trend. It improved by one penny in the past 30 days compared with the last 60 days’ estimate. Again, the estimate grew by another penny in the last 7 days in comparison with the last 30 days.
Agreement of Estimate Revisions
Only 2 out of the 17 analysts covering the stock for the first quarter of fiscal 2011 have made upward revisions while only one has made a downward revision in the last 30 days. However, no changes have been made in the past 7 days. A weak housing with a very slow recovery has forced the analysts to remain cautious on the stock.
Magnitude of Estimate Revisions
A loss of 29 cents per share was expected 60 days ago, while in the last 30 days it was reduced by a penny to 28 cents. Ultimately, it came down to a loss of 27 cents per share in the past 7 days. The Zacks Consensus Estimate for the first quarter is 50% higher than the year-ago loss of 18 cents.
A depressed housing industry is the biggest concern for any homebuilder including KB Home. Besides, there is no sign of a speedy recovery. Thus, poor performance in terms of housing is very likely for the company. However, KB Home’s continuous efforts to fight the situation and minimize its loss as much as possible are worth mentioning.
In this regard, KB Home has launched a number of business models to attract homebuyers. Some homes give the buyers flexibility to design their homes in their own way, while some provide energy alternatives to save on utility bills of the customers. The company is also aggressively buying lots in the key markets in order to stay well-equipped for the near future.
KB Home shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Besides, we also give the stock a ‘Neutral’ recommendation in the long term.