KB Home Disappoints Despite Housing Market Strength

| About: KB Home (KBH)

Summary

After a brief lull, new home sales soared in August.

KB Home wasn't able to fully cash in on housing market strength in the third quarter, in part due to delays.

Deferred deliveries and rising starts could boost the company's results going into the fourth quarter.

After a brief cool down period earlier in the year, the US housing market seems to have regained its footing and is powering ahead full-steam once again, looking at the August figures. A range of industries has been able to benefit from this trend, one of which of course being homebuilders. However, not all companies have been able to cash in on housing market strength equally. Also, one of the most important macro figures for homebuilders, new home sales, has been showing some choppy readings over the last few months. Let's take a look at KB Home's (NYSE:KBH) most recent earnings report to give the macro figures some color.

Recent macro numbers

In all fairness, new home sales haven't risen through all of the company's fiscal third quarter. In June, new home sales declined by a hefty 8.1% for the lowest read since March and considerably lower than what analysts had predicted. Rising prices and high mortgage rates put a drag on sales. In July, this figure was revised higher, although July itself saw another decline of around 2.4%, with the annualized rate again missing the analyst consensus.

However, then came the August report. For the month, new home sales surged a whopping 18% sequentially for the biggest one-month jump since 1992 and the highest annualized rate since 2008. Year-over-year, the figure was up 33%. According to analysts, several factors contributed to the strong performance, including a larger number of weekends, and an easy comparison with last year when interest rates began to rise. In any case, should the market sustain this momentum, homebuilders should be looking forward to a significant boost in sales.

Delays weigh on results

KB Home's third quarter results came in well below the Street's expectations. EPS of $0.28 was down from $0.30 a year ago and was nowhere near the $0.40 analysts had projected. Number of homes delivered slipped to 1,793 from 1,825 a year ago, which was largely attributed to a new joint venture with Nationstar Mortgage (NYSE:NSM). Meanwhile, revenue increased by 7% on a 9% increase in average selling price, while net orders rose 5% to 1,827 units.

According to management, delays in construction schedules and customer mortgages pushed some of the deliveries into the fourth quarter. Also contributing to delays were labor shortages and problems with utility companies, as well as a higher than expected amount of paperwork processing and approval issues related to its new mortgage structure.

The Street may have set the bar a bit too high for the company's third quarter, expecting earnings to grow by more than 30% from a year ago. As such, with a huge uptick in new home sales in August, coupled with deliveries delayed to the fourth quarter, it looks like KB Home should be able to offset this quarter's disappointing numbers with a strong showing for the last quarter of the year.

Conclusion

August saw some of the strongest new home sales in years, rising a whopping 18% sequentially and 33% year-over-year. This should be good news for homebuilders, although for this quarter, KB Home didn't manage to fully benefit from the strength in the housing market. However, going into the fourth quarter, deferred sales should provide a boost to the company's results, and if the market manages to hold on to this momentum, homebuilders as a whole should enjoy a significant lift towards the end of the year.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Residential Construction, Earnings
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