KB Home’s (KBH - Free Report) shares have gained more than 6% in after-hour trading yesterday on solid third-quarter fiscal 2018 results. Not only did the homebuilder’s bottom line surpass the Zacks Consensus Estimate but it also increased considerably year over year. The performance reflects a solid housing market despite rising interest rate woes.

The company’s shares have gained 17% in the past year, while its industry has declined 6.1%. The outperformance was backed by an impressive earnings surprise history, beating the consensus mark for 11 straight quarters.

Earnings & Revenue Discussion

Quarterly earnings of 87 cents per share outpaced the Zacks Consensus Estimate of 78 cents by 11.5% and increased 71% from 51 cents a year ago.

Total revenues of $1.22 billion, however, missed the consensus mark of $1.27 million. The top line improved 7.1% year over year on higher housing revenues.

Segment Details

Homebuilding Revenues: In the reported quarter, homebuilding revenues increased 7.1% to $1,221.9 million from the prior-year quarter, driven by an increase in the number of homes delivered. While land generated $2.3 million in revenues (down 33.3% from the year-ago quarter), housing revenues totaled $1,219.6 million (up 7.2%).

Net orders increased 3% to 2,685 homes, rising across the Central and Southeast regions, while net orders fell in West Coast and Southwest regions. Value of net orders, however, decreased 5% to $1.02 billion.

Number of homes delivered improved 8% from the year-ago level to 2,988 units. Deliveries increased in three regions, except West Coast. Average selling price fell a slight 0.8% to $408,200.

At the end of the reported quarter, average community count was 217, down 7% year over year.

The company’s backlog totaled 5,484 homes (as of Aug 31, 2018), up 0.5% from a year ago. Potential housing revenues from backlog decreased 4% to $2.04 billion.

Margins

Adjusted housing gross profit margin (a metric that excludes the amortization of previously capitalized interest and inventory-related charges) expanded 140 basis points (bps) year over year to 23.1%.

As a percentage of housing revenues, selling, general and administrative expenses (SG&A) were 9.4%, up 20 bps from the year-ago figure.

Homebuilding operating margin increased 190 bps on a year-over-year basis, primarily driven by continued improvement in its housing gross margin.

Financial Services revenues grew 8% year over year to $3.5 million.

Financial Position

KB Home had homebuilding cash and cash equivalents of $354.4 million as of Aug 31, 2018, lower than $720.6 million as of Nov 30, 2017. Inventories were $3.7 billion, up from $3.3 billion as of Nov 30, 2017. KB Home had total liquidity of $816.7 million at the end of the quarter.

Net cash used in operating activities was $49.5 million in the first nine months of fiscal 2018, compared with $103.3 million of net cash provided by operating activities a year ago.

The ratio of debt to capital was 50.6% (up 410 bps) as of Aug 31, 2018, while that of net debt to capital was 45.9%, which is within the company’s 2019 targeted range under its Returns-Focused Growth Plan.

KB Home Price, Consensus and EPS Surprise

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

Fourth-Quarter Guidance

KB Home expects housing revenues between $1.39 billion and $1.45 billion and ASP of around $400,000-$405,000. Meanwhile, SG&A ratio is projected in the range of 8.8-9.2%. Average community count is expected to be flat with the year-ago level of 228.

The company expects housing gross margin (assuming no inventory-related charges) in the range of 18.3-18.7%.

Homebuilding operating margin (excluding impact of any inventory-related charges) is expected within 9.3-9.7%.

Fiscal 2018 Guidance Revised

KB Home now expects housing revenues of approximately $4.6 billion, which is at the low end of its previous guided range of $4.6-$4.8 billion. Average community count is now anticipated to be up 4% year over year.

The company expects housing gross margin (excluding inventory-related charges) at the high end of the earlier guided range of 17.6-18%, i.e., at 18%, reflecting an improvement of 110 bps. SG&A ratio will now likely be around 9.8% versus 8.8-9.2% expected earlier.

Homebuilding operating margin is now expected at around 8.2%, which is at the high end of the previously projected range of 7.7-8.2%.

Key Picks

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

Some better-ranked stocks in the Zacks Construction sector are Beazer Homes USA, Inc. (BZH - Free Report) , Century Communities, Inc. (CCS - Free Report) and D.R. Horton, Inc. (DHI - Free Report) , each carrying a Zacks Rank #2 (Buy). 

Beazer Homes has an average positive earnings surprise of 169.7% for the last four quarters.

Century Communities has an average positive earnings surprise of 55.3% for the trailing four quarters.

D.R. Horton has an expected earnings per share growth rate of 41.2% for the current year.