KB Home: Yet Another Post-Earnings Fade For A Home Builder

“KB Home shares jump on third quarter earnings” – such is the kind of quick trigger post earnings headline that consistently fails for home builders. KB Home (KBH) opened higher by 5.7% but was all downhill from there. At the close, KBH lost 3.1% on the day in a major reversal. This close was a vast improvement on a loss which reached 6.4% at the intraday low. Bottom-fishers were not able to push the stock back over its declining 50-day moving average (DMA).

KB Home (KBH) faded hard post-earnings on extremely high trading volume to close below its 50DMA.

Source: TradingView

In her reporting, Diana Olick, CNBC’s housing market reporter, pointed to a red flag in a 26% cancellation rare; most home builders are “in the teens.” KBH did not address this high cancellation rate and analysts did not ask about it either (SA Transcript). However, this rate was only up by one percentage point year-over-year; KBH simply tends to have a high cancellation rate.

As usual, KBH reported generally strong results. From the earnings slide presentation and the earnings release (percentage changes on a year-over-year basis):

Housing Revenues: +7%

Net income: +74%

Earnings per diluted share: +71%

Operating income: +38%

Adjusted housing gross profit margin: +140 basis points

Deliveries: +8%

Average Selling Price: -1%

Net Order Value: -5%

Net Orders: +3%

Backlog Value: -4%

Ending Community Count: -3%

Average Community Count: -7%

Absorption (net orders per community, per month): 11%

During the conference call, KBH summarized its guidance in strong terms:

“…a solid outlook for the fourth quarter, we expect a meaningful improvement in our book value by the end of this year. We are poised to finish 2018 with growth in revenues and a significantly higher year-over-year operating margin fueled primarily by the expansion of our gross margin, a key goal for us. As we look ahead to 2019, the combination of community count growth beginning in the fourth quarter of this year, a substantial increase in communities slated to open in 2019, and maintaining our solid absorption pace gives us confidence in achieving our targets next year.”