KB Homes sees improvement in housing as mortgage rates moderate
2min read KB Home (KBH) reported its Q3 earnings with mixed results, missing slightly on earnings per share (EPS) but beating revenue expectations. The company posted EPS of $2.04, just below the consensus estimate of $2.06, while revenues increased by 11% year-over-year to $1.75 billion, surpassing the $1.72 billion expected by analysts. The number of homes delivered grew by 8% to 3,631 units, slightly ahead of estimates, and the average selling price rose 3% to $480,900, matching expectations. However, net orders fell 0.4% year-over-year, and the backlog decreased by 18%, both of which raised concerns among investors.
A key focus in this earnings report was KB Home’s gross margins, which have been under scrutiny following weaker-than-expected margins from industry peer Lennar (LEN). KB Home reported a housing gross profit margin of 20.6%, down from 21.5% in the same quarter last year. This decline was attributed to product and geographic mix, which also led to a decrease in the homebuilding operating income margin to 10.8%, compared to 11.3% the previous year. The company's average selling price of $480,900 was a positive note, reflecting a 3% increase year-over-year.
Despite the challenges, KB Home provided guidance that suggests a steady outlook for the remainder of the year. The company expects full-year housing revenues to range between $6.85 billion and $6.95 billion, slightly above prior expectations. The average selling price is anticipated to be around $490,000, indicating confidence in maintaining price levels despite market pressures. However, the housing gross profit margin is expected to range between 21.1% and 21.2%, which is lower than last year’s margin, reflecting continued margin pressure.
The company's commentary on the housing market highlighted the variability in demand throughout the quarter, with softening seen in late June through July due to elevated mortgage rates and economic concerns. However, as mortgage rates moderated in August, KB Home saw an improvement in net orders, particularly for affordably priced, personalized homes. This trend has continued into the early part of the fourth quarter, suggesting a potential stabilization in demand.
KB Home’s management emphasized their focus on balancing short-term market dynamics with long-term strategic goals. The company significantly increased its investment in land acquisition and development by over 50% year-over-year, reflecting its commitment to growth despite current market challenges. Additionally, KB Home repurchased $150 million of its common stock during the quarter, indicating confidence in its long-term prospects.
The housing market’s current dynamics, characterized by fluctuating demand and high mortgage rates, present both challenges and opportunities for KB Home. The company’s ability to navigate these conditions, while maintaining profitability and expanding its community count, will be critical in the coming quarters. Investors are likely to watch closely how KB Home manages its margins and backlog in an increasingly competitive market.
Overall, while KB Home's Q3 results showed some areas of strength, particularly in revenue growth and average selling price, the decline in gross margins and net orders suggests that the company faces ongoing challenges. The guidance for the full year is cautiously optimistic, but the company will need to continue adapting to market conditions to meet its targets and reassure investors.