It has been about a month since the last earnings report for KB Home (KBH Quick QuoteKBH - Free Report) . Shares have lost about 0.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is KB Home due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

KB Home (KBH Quick QuoteKBH - Free Report) Q3 Earnings Beat, Revenues Miss on Supply Woes

KB Home’s earnings surpassed the Zacks Consensus Estimate, revenues missed the same owing to supply chain disruptions and labor shortages. Nonetheless, earnings and revenues grew significantly from a year ago, buoyed by strong housing market demand.

Jeffrey Mezger, Chairman, President and Chief Executive Officer, said, "As we approach the end of our 2021 fiscal year, we expect that our increased scale at a higher profitability level will generate a return on equity of approximately 20% for the year. Looking ahead to 2022, we anticipate another year of profitable growth. With a sizable increase in our backlog value and projected increases in community count and margins, we expect a meaningful expansion of our return on equity that will be further enhanced by the $188 million we returned to stockholders through recent share repurchases."

Earnings & Revenue Discussion

KB Home reported quarterly adjusted earnings of $1.64 per share, which surpassed the consensus estimate of $1.60 by 2.5%. Also, the metric grew significantly from the year-ago figure of 83 cents per share.

Total revenues of $1,467.1 million missed the consensus mark of $1,560 million by 6%. Nonetheless, revenues grew 46.9% on a year-over-year basis.

Segment Details

Homebuilding: For the quarter under review, the segment's revenues of $1,461.9 million increased 46.9% from the prior-year period.
The number of homes delivered grew 35% from the year-ago level to 3,425 units. Further, average selling price or ASP increased 11% from a year ago to $426,800.

Net orders dropped 3% from the prior-year quarter to 4,085 homes. Nonetheless, value of net orders rose 22% from the year-ago quarter to $2.01 billion.

For the reported quarter, average community count was down 14% from a year ago to 205. Quarter-end community count was 210, down 9% from the prior year.

Cancellation rate, as a percentage of gross orders, improved to 9% from 17% reported a year ago. Its quarter-end backlog totaled 10,694 homes (as of Aug 31, 2021), up 58% from a year ago. Further, potential housing revenues from backlog grew 89% from the prior-year period to $4.84 billion.

Margins

Within homebuilding, housing gross margin (excluding inventory-related charges) improved 140 basis points (bps) year over year to 22%. The increase was attributed to a favorable pricing environment due to robust housing market demand, increased operating leverage on higher revenues and lower amortization of previously capitalized interest.

As a percentage of housing revenues, selling, general and administrative expenses improved 110 bps from the year-ago figure to 9.9% due to higher operating leverage, given strong housing demand.

Homebuilding operating margin (excluding inventory-related charges) increased 250 bps to 12.1%.

Financial Services revenues rose 34.7% year over year to $5,206 million. Pretax income of $9.4 million rose 2.9% from a year ago.

Financial Position

KB Home had cash and cash equivalents of $350 million as of Aug 31, 2021, down from $681.2 million on Nov 30, 2020. The company had total liquidity of $1.4 billion, including $791.4 million of available capacity under the unsecured revolving credit facility.

Inventories increased 19% from Nov 30, 2020, to $4.66 billion at the end of third-quarter fiscal 2021.

Guidance

For the fiscal fourth quarter, the company expects ASP of $450,000, indicating an increase of 9% from a year ago. Housing revenues are projected in the range of $1.65-$1.75 billion. Homebuilding operating income margin (excluding the impact of any inventory-related charges) is expected to improve to 11.8% in the quarter, suggesting an increase from 10.7% a year ago. Assuming no inventory-related charges, KB Home expects fiscal fourth-quarter housing gross margin in the range of 21.6-22%. SG&A expense ratio will be approximately 10% during the fiscal fourth quarter. This suggests an improvement from 10.3% in the year-ago period.

The company expects year-end community count to improve slightly from the third quarter, resulting in a high single-digit decline in the average fourth-quarter count as compared to the prior year.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -15.49% due to these changes.

VGM Scores

Currently, KB Home has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, KB Home has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.