Earnings Preview: KB Home (KBH) likely to deliver mixed Q2 results

KB Home (NYSE: KBH) had a strong start to fiscal 2024, delivering solid first-quarter results that topped expectations. The homebuilder is preparing to publish its Q2 report on June 18 at 4:10 pm ET. While analysts estimate a modest outcome, the company looks poised to impress the market, leveraging the high demand for new homes amid economic recovery and improving homebuyer sentiment.

The company’s stock, which has gained about 23% in the past six months, peaked in mid-May. While the current valuation looks high, investors would want to add the stock to their portfolios considering its promising long-term prospects. The dividend yield is stable, thanks to the healthy balance sheet and cash flows.

Estimates

When KB Home reports second-quarter results on Tuesday, June 18, after the closing bell, the market will be looking for earnings of $1.80 per share. In the year-ago quarter, the company had earned $1.94 on a per-share basis. On average, nine analysts estimate that the company generated revenues of $1.65 billion in the May quarter, compared to $1.77 billion in the corresponding period of fiscal 2023.

The company’s positive Q1 performance, marked by strong order growth and a good start to the spring selling season, indicates that KB Home is on track to achieve its near-term performance goals. It bets on the healthy backlog, improved build times, and new community openings to beat headwinds like macro uncertainties and elevated mortgage rates. The bullish outlook on the new home market is good news for the company, considering its focus on first-home buyers.

Headwinds

Meanwhile, since KB Home’s financial performance is influenced by interest rates, the central bank’s hawkish policy stance is a cause for concern. Higher operating expenses, especially raw material costs, can drag margins. It is worth noting that operating income margin declined by 60 basis points to 10.8% in the most recent quarter. Also, profitability may face challenges due to pricing pressure amid a potential oversupply of new homes.

From KB Home’s Q1 2024 earnings call:

“We have continued to experience strong sales since the start of our second quarter and believe we are well positioned to respond to this buyer demand given our products and price points, as well as plan new community openings in the first half of this year. On a per-community basis, our absorption pace accelerated as the quarter progressed, averaging 4.6 monthly net orders for the full quarter. Our strategic goals continue to be optimizing each asset on a community-by-community basis…”

Strong Q1

In the first three months of fiscal 2024, net income increased to $138.7 million or $1.76 per share from $125.0 million or $1.45 per share in the same period of 2023. The bottom line topped expectations for the fourth time in a row. At $1.47 billion Q1 revenues were up 6% year-over-year but fell short of expectations. This marks the eighth consecutive quarter where revenue has missed analysts’ projections. The top line benefitted from a strong performance by the core Homebuilding segment. Net order value increased 58% to $1.58 billion during the three months.

On Thursday, the stock traded lower in the early hours, maintaining a price level broadly unchanged from three months ago. KBH is up a whopping 37% since last year.