Share price of KB Home (KBH - Analyst Report) declined 12.3% as the company reported dismal fourth quarter 2014 results, missing the Zacks Consensus Estimate for earnings by a significant margin.

KB Home’s adjusted earnings of 27 cents per share in the fourth quarter of fiscal 2014 lagged the Zacks Consensus Estimate of 52 cents by 48% and declined 12.9% from the year-ago earnings of 31 cents per share. Earnings were hurt by weak margins.

Fewer-than-expected home deliveries also impacted gross margin during the quarter as the company lost some operating leverage related to increasing indirect construction cost. Margins were also affected by higher incentives in the quarter.

The company’s reported earnings per share were $8.36, which includes an income tax benefit of $824.2 million, which is reflected as $825.2 million of deferred tax asset valuation allowance reversal.
 

Total revenue of $796 million in the fourth quarter surpassed the Zacks Consensus Estimate of $779 million by 2.2%. In addition, revenues increased 28.7% from the year-ago quarter.

Quarter Details

In the fourth quarter of fiscal 2014, homebuilding revenues increased 29% year over year to $792.8 million, driven by higher average selling prices.

The number of homes delivered increased 9% from the year-ago quarter to 2,229 homes. The number of homes delivered was however near the lower end of the company’s expected range of 2,200 and 2,400 homes.

Average selling price (ASP) rose 17% year over year to $351,500, driven by a strategic shift in product mix. With more communities in lucrative markets of northern California, KB Home shifted its product mix toward higher priced larger homes. This way the company could cater to high income consumers. Regionally, average selling prices increased 1% in the Southwest to 17% in the West Coast region.

The company’s backlog totaled 2,909 homes as of Nov 30, 2014, up 14% year over year. Potential housing revenues from backlog rose 34% to $914.0 million owing to higher number of homes in backlog and increased pricing. At the end of the quarter, the company had 227 communities, up 19% from the prior-year quarter.

Net orders rose 10% in the quarter to 1,706 homes driven by the company’s higher average community count. The order trends benefited from the company’s increased emphasis on balancing home selling prices and sales pace in order to optimize the performance of its new home communities. The value of net orders increased 22% to $587.4 million.

KB Homes’ order trends started improving since early 2014 on the back of aggressive land investments made by the company in the past quarters.

Adjusted homebuilding gross margin (excluding land option contract abandonment charges and warranty related charges) declined 110 basis points (bps) year over year to 18.7%.

Adjusted gross margin was lower than the company’s expectation of sequential improvement over the third quarter of 2014. In fact, adjusted homebuilding gross margin declined 30 bps sequentially owing to softer demand in response to pricing pressure and higher construction, labor and material costs.
 

Fiscal 2014

KB Home’s adjusted earnings of 94 cents per share in fiscal 2014 lagged the Zacks Consensus Estimate of $1.23 by 23.6% but increased 104.4% from the year-ago earnings of 46 cents per share.

The company’s reported earnings per share were $9.25, which includes an income tax benefit reflected as deferred tax asset valuation allowance reversal.

Total revenue of $2.40 billion was in line with the Zacks Consensus Estimate. In addition, revenues increased 14% from the year-ago quarter, owing to an increase in number of homes delivered and average selling price.

Outlook

KB Home expects gross margin to be lower than 20% in 2015. Gross margin is expected to hit a bottom in the first quarter of 2015, with sequential improvement throughout the rest of the three quarters of 2015.  

KB Home currently carries a Zacks Rank #4 (Sell).

Other Stocks to Consider

Better-ranked stocks in the building/construction industry worth considering include DR Horton Inc. (DHI - Analyst Report), PulteGroup, Inc. (PHM - Analyst Report) and TRI Pointe Homes, Inc. (TPH - Snapshot Report). All the three companies hold a Zacks Rank #2 (Buy).