KB Home (NYSE:KBH) Beats Q3 Sales Targets But Stock Drops

Homebuilder KB Home (NYSE:KBH) reported Q3 CY2024 results topping the market’s revenue expectations, with sales up 10.4% year on year to $1.75 billion. Its GAAP profit of $2.04 per share wasin line with analysts’ consensus estimates.

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“In the third quarter, we achieved strong year-over-year growth in both revenues and diluted earnings per share,” said Jeffrey Mezger, Chairman and Chief Executive Officer.

Company Overview

The first homebuilder to be listed on the NYSE, KB Home (NYSE:KB) is a homebuilding company targeting the first-time home buyer and move-up buyer markets.

Home Builders

Traditionally, homebuilders have built competitive advantages with economies of scale that lead to advantaged purchasing and brand recognition among consumers. Aesthetic trends have always been important in the space, but more recently, energy efficiency and conservation are driving innovation. However, these companies are still at the whim of the macro, specifically interest rates that heavily impact new and existing home sales. In fact, homebuilders are one of the most cyclical subsectors within industrials.

Sales Growth

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Thankfully, KB Home’s 8.7% annualized revenue growth over the last five years was decent. This shows it was successful in expanding, a useful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. KB Home’s recent history shows its demand slowed as its revenue was flat over the last two years.

KB Home also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. KB Home’s backlog reached $2.92 billion in the latest quarter and averaged 26.7% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company hasn’t secured enough new orders to maintain its growth rate in the future.

This quarter, KB Home reported robust year-on-year revenue growth of 10.4%, and its $1.75 billion of revenue exceeded Wall Street’s estimates by 1.4%. Looking ahead, Wall Street expects sales to grow 5.1% over the next 12 months, an acceleration versus the last two years.

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Operating Margin

KB Home has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 11.8%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, KB Home’s annual operating margin rose by 2.9 percentage points over the last five years, showing its efficiency has improved.

This quarter, KB Home generated an operating profit margin of 10.8%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

KB Home’s EPS grew at an astounding 25.5% compounded annual growth rate over the last five years, higher than its 8.7% annualized revenue growth. This tells us the company became more profitable as it expanded.

Diving into KB Home’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, KB Home’s operating margin was flat this quarter but expanded by 2.9 percentage points over the last five years. On top of that, its share count shrank by 17.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business. For KB Home, its two-year annual EPS declines of 4.5% show its recent history was to blame for its underperformance over the last five years. We hope KB Home can return to earnings growth in the future.

In Q3, KB Home reported EPS at $2.04, up from $1.81 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects KB Home’s full-year EPS of $7.84 to grow by 8%.

Key Takeaways from KB Home’s Q3 Results

It was good to see KB Home beat analysts’ revenue expectations this quarter. We were also glad its full-year revenue guidance came in above Wall Street's estimates. On the other hand, its backlog (a leading indicator of future demand) fell short, spooking investors. Overall, this was a mediocre quarter. The stock traded down 6% to $82.20 immediately following the results.

KB Home’s earnings report left more to be desired. Let’s look forward to see if this quarter has created an opportunity to buy the stock. What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock.We cover that in our actionable full research report which you can read here, it’s free.