KB Home (KBH) will report third quarter (August) results
this afternoon and host a call at 17:00.
After a huge run of in 2017 (the iShares US Home Construction ETF: ITB rose 59%), homebuilder stocks have languished in 2018 (ITB -16% year-to-date).
The new home market remains strong as a supply deficit remains in place amid pent-up demand.
Still, the market fears that the housing cycle has grown long in the tooth. Higher home prices, interest rates, and input costs have some thinking the best of the housing market has passed.
Activity in the used market is softer than the new home market.
But homebuilders remain bullish given the supply-demand imbalance. Last month, Toll Brothers (TOL) described a ‘flight to new homes' as consumers increasingly want a new custom house. The luxury homebuilder said more buyers are looking at new homes only, creating a record premium for new homes versus the used market.
Coming back to KB Home, top-line growth slowed in the first half of fiscal 2018 due to a lack of supply. The company's community count fell 10% in the second quarter and is expected to fall 10% in the third quarter before ending the year up slightly and then growing each quarter next year.
KB Home guided for third quarter homebuilding revenue of $1.23-1.29 bln with an average selling price (ASP) of $410-415K, gross margin 17.6-18.0%, adjusted operating margin 7.8-8.4%.
Last quarter, KB Home reported homebuilding revenue up 10% with deliveries up 5% to 2,717 homes and ASP up 4% to $401,800. Gross margin expanded 170 basis points year/year to 17.1%, or 17.7% excluding inventory charges, versus guidance for a 16.8-17.2%.
The company said market conditions remain robust with tight supply and strong demand as first time home buyers fuel market activity.
Backlog was up 3% to $2.2 bln, the highest second quarter backlog value in 11 years.
KB Home narrowed FY18 homebuilding revenue to $4.6-4.8 bln from $4.55-4.85 bln, reaffirmed average selling price at $400-410K, raised gross margin to 17.6-18.0% (+70-110 bps year/year) from 17.4-17.9% and operating margin to 7.7-8.2% from 7.4-8.0%.
The stock reacted favorably to the upside second quarter results in June but is now trading almost exactly where it heading in to that report while the ITB is down ~3% over the same period.
KB Home has a $2.2 bln market value and trades at ~1.2x book value, in-line with Toll Brothers (TOL) but a discount to larger builders Lennar (LEN), D.R. Horton (DHI) and PulteGroup (PHM), which have more scale.
Out tomorrow morning, August New Home sales are expected to grow 0.5% month/month.
The Federal Reserve is expected to raise rates for the third time this year tomorrow afternoon, but the FOMC's outlook will be more important in determining how rates and markets react.
- OUR VIEW
- LEARNING CENTER