Shares of homebuilder KB Home (KBH 24.71, +1.18, +5.01) are higher after the company reported relatively strong second quarter results.
Revenue fell 8% yr/yr but came in above the company's forecast as deliveries grew 2% and the average selling price (ASP) of homes fell 8%.
KB Home missed its ASP forecast and reported improving net orders for the second consecutive quarter.
Forward-looking net orders grew 15% after falling 4% in the first quarter. This was driven by a 17% increase in the community count, the best growth in that metric in four years.
With ample exposure to the California market (43% of second quarter order value came from the West Coast region), supply constraints in the Golden State have been a recurrent issue for KB Home. Encouragingly, management said community count growth in California in the second half of the year should help ASPs return to growth after a higher mix of lower priced homes led to a 7% decline in ASPs in the first half of fiscal 2019.
The company's gross profit margin came in above guidance, growing 10 basis points yr/yr. Second quarter earnings beat estimates handily, but operating income fell 30% amid lower home prices and increased marketing costs to support new communities.
From a macroeconomic perspective, management remained positive on the market given the supply deficit, positive demographics, steady economic growth and strong consumer confidence.
Analysts at KeyBanc and Buckingham both upgraded the stock this morning.
The stock had been trading just under 1.0x book value, which was a moderate discount to large builder peers at ~1.3x on average.
The significant improvement in net orders gives investors a reason to be excited. Management has been calling for a return to community count growth (+10-15% this year) for some time. What's more, the new home market has improved this year as affordability headwinds dissipated. As a result, continued execution by management would bode well for the company's financials going forward.