KB Home’s (KBH - Free Report) shares have gained more than 4% in the after-hour trading session yesterday, after it reported stellar second-quarter fiscal 2018 results. Not only the homebuilder’s top and bottom lines surpassed the Zacks Consensus Estimate but also considerably increased year over year, courtesy of solid housing market.

This Zacks Rank #3 (Hold) company’s shares have gained 6.7% in the past year, outperforming its industry’s growth of 1.4%. The outperformance was backed by an impressive earnings surprise history, beating the consensus mark for 10 straight quarters.

Meanwhile, earnings estimates have remained stable over the past 30 days. Impressive earnings performance, a healthy housing industry and strong demand trends in the KB Home-served markets should drive the stock’s performance in the upcoming quarters as well.

Earnings & Revenue Discussion

Quarterly earnings of 57 cents per share outpaced the Zacks Consensus Estimate of 49 cents by 16.3% and increased significantly by 72.7% from 33 cents in the year-ago period.

Total revenues of $1.1 billion surpassed the consensus mark of $1.05 million. The top line also improved nearly 10% year over year, driven by higher housing revenues.

Segment Details

Homebuilding Revenues: In the reported quarter, homebuilding revenues increased 9.9% from the prior-year quarter to $1,098.7 million, driven by an increase in the number of homes delivered and average selling price or ASP. While land generated $6.9 million in revenues (up 56.5% from the year-ago quarter), housing revenues came in at $1,091.8 million (up 9.7%).

Net orders increased 3.4% to 3,532 homes, increasing across the board, barring West Coast. Value of net orders, however, decreased 1.6% to $1.36 billion.

Number of homes delivered improved 5% from the year-ago level to 2,717 units. Deliveries increased in three regions, except Southeast. Average selling price went up 4% to $ 401,800.

At the end of the reported quarter, average community count was 215, down 10% year over year.
The company’s backlog totaled 5,787 homes (as of May 31, 2018), up 3.1% from a year ago. Potential housing revenues from backlog increased 2.5% to $2.24 billion. Although the Southwest and Southeast regions registered gains, backlog decreased in West Coast and Central.

Margins

Adjusted housing gross profit margin (a metric that excludes the amortization of previously capitalized interest and inventory-related charges) expanded 120 basis points (bps) year over year to 22.2%.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) were 10.4%, in line with the year-ago figure.

Financial Services: Financial Services’ revenues grew 1% year over year to $2.8 million.

KB Home Price, Consensus and EPS Surprise

KB Home Price, Consensus and EPS Surprise | KB Home Quote

Financial Position

KB Home had homebuilding cash and cash equivalents of $669.8 million as of May 31, 2018, lower than $720.6 million as of Nov 30, 2017. Inventories were $3.5 billion, up from $3.3 billion as of Nov 30, 2017.

Net cash used in operating activities was $19.4 million in the first six months of fiscal 2018 compared with $64.6 million a year ago.

The ratio of debt to capital was 55.1% as of May 31, 2018, while that of net debt to capital was 46.8%, which is within the company’s 2019 targeted range under its Returns-Focused Growth Plan.

Third-Quarter Guidance

KB Home expects housing revenues between $1.23 billion and $1.29 billion and ASP of around $410,000-$415,000. Meanwhile, SG&A ratio will likely be in the range of 9.3-9.8%. Average community count is anticipated to be down 10% from the third quarter of 2017.

The company expects third-quarter housing gross profit margin (assuming no inventory-related charges) in the range of 17.6-18% (16.8-17.2% expected earlier).

Homebuilding operating margin (excluding impact of any inventory-related charges) is expected to be within 7.8-8.4%.

Fiscal 2018 Guidance

KB Home has narrowed housing revenue guided range to $4.6-$4.8 billion from prior expectation of $4.55-$4.85 billion. The company reiterated ASP projection in the range of $400,000-$410,000. Average community count is now anticipated to be slightly up (versus flat to down 5% expected earlier) year over year.

The company boosted housing gross profit margin (excluding inventory-related charges) expectation to the range of 17.6-18% (earlier it was 17.4-17.9%), reflecting an improvement of 72-110 bps. SG&A ratio will now likely be around 9.6-9.9% (versus 9.7-10% expected earlier).

Homebuilding operating margin is now expected in the range of 7.7-8.2% (from prior expectation of 7.4-8%).