KB Home (KBH) announced that it would release its results for the third quarter of fiscal 2011 that ended on August 31, 2011 before the market opens on September 23, 2011.
Los Angeles, California-based KB Home realized an adjusted net loss of 43 cents in the second quarter of fiscal 2011, much wider than the Zacks Consensus Estimate of a loss of 32 cents per share. In the upcoming quarter, the Zacks Consensus Estimate for KB Home is pegged at a loss of 17 cents per share, reflecting an annualized decline of 736%. The upside potential of the estimate, essentially a proxy for future earnings surprises, is 11.77%.
With respect to earnings surprises, the company negatively outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 0.84% (downward direction), implying that the company has missed the Zacks Consensus Estimate in the last four quarters. Two of the concerned quarters missed the estimates at a higher rate thereby offsetting the positive surprises in the remaining two quarters.
Second Quarter Recap
Total revenue fell 27% to $271.7 million in the quarter, mainly driven by a 28% decline in housing revenues to $270 million. The decrease in housing revenues reflected a 29% decrease in the number of homes delivered to 1,265 homes, partly offset by a 3% rise in average selling price to $213,400. However, quarterly revenues were higher than the Zacks Consensus Estimate of $266 million.
Meanwhile, net orders fell 11% to 1,998 homes from 2,244 homes a year ago. As a percentage of gross orders, the company’s cancellation rate was 25% in the quarter compared with 24% in the prior-year period.
As of May 31, 2011, the company’s backlog totaled 2,422 homes, a decline of 24% from 3,175 homes in the year-ago period. Potential housing revenues from backlog fell 23% to $501.5 million as of May 31, 2011 from $648.2 million as of May 31, 2010, primarily due to the lower number of homes in backlog.
The company’s homebuilding business (including housing and land) posted an operating loss of $57.5 million in the quarter compared with a loss of $17.3 million in the second quarter of fiscal 2010.
Selling, general and administrative (SG&A) expenses dipped 25% to $62.5 million from $83.0 million a year ago. Lower SG&A expenses were attributable to the company’s efficient organizational structure, reduced overhead, lower legal expenses and lower volume of homes delivered.
The Financial Services business, which include KB Home’s equity interest in an unconsolidated mortgage banking joint venture, registered a 14% rise in revenues to $1.76 million. The segment reported a pre-tax income of $1.6 million in the quarter versus $4.2 million in the year-earlier quarter.
The reduction in pre-tax income was driven by lower equity in the unconsolidated joint venture’s income. The lower equity income was the result of lower mortgage loan originations and lower profits per loan.
KB Home had cash and cash equivalents of $735.3 million and total debt of $956.4 million as of May 31, 2011. The debt-to-capitalization ratio worsened to 79% in the same period from 77% as of February 28, 2010.
Estimate Revisions Trend
Earnings estimate for the third quarter of fiscal 2011 is currently pegged at a loss of 17 cents per share. The ongoing weakness in the housing industry induced the analysts to adopt a cautious stance on the company’s performance in the upcoming quarters.
Agreement of Estimate Revisions
Out of the 11 analysts covering the stock for the third quarter of fiscal 2011, none has either upgraded or downgraded the stock in the past 30 days.
Magnitude of Estimate Revisions
Following the first quarter earnings release in June, third quarter loss per share was projected at only 2 cents. However, over the last 60 days, the loss estimate increased to 15 cents per share. Then again the loss estimate widened to 17 cents per share in the last 30 days. Since then, the estimate is being maintained at a loss of 17 cents per share.
Our Take
A depressed housing industry is the biggest concern for any homebuilder including KB Home. Besides, there is no sign of a speedy recovery. Home sales declined consistently in each of the first three months of the year. The situation is feared to deteriorate further. In addition, house prices also plunged continuously, driven by an excess supply of homes in the face of depressed demand coupled with tough competition from pre-owned homes.
Moreover, KB Home’s lack of geographic diversity and thus high dependency on certain markets like the Central U.S. (Colorado and Texas) and the West Coast (California) exposes it to considerable risk as compared with other homebuilders like Lennar Corp. (LEN) or DR Horton Inc. (DHI).
Keeping these in mind, the shares of KB Home are maintaining a Zacks #4 Rank, which translates into a short-term “Sell” rating.
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