Homebuilder KB Home (click ticker for report: ) reported strong third quarter results Friday. Earnings exceeded consensus expectations by a whopping $0.20 as the firm earned $0.04 per share, compared to a loss of $0.13 during the same period last year. The earnings increase was due almost entirely to a positive income tax benefit of $10.7 million, but the firm’s operating loss still improved by $2 million. Revenue grew 16% year-over-year to $425 million, slightly below consensus estimates but strong nonetheless.
The third quarter’s metrics were pretty strong across the board, as average selling prices increased 8% year-over-year to $245,100 and home deliveries increased 7% to 1,720. Pricing was particularly strong in the West and Southwest regions, growing 14% and 13%, respectively. We think both regions will continue to outperform much of the nation due to the collective shift from the Midwest to the Sunbelt, and the economic growth taking place in California, particularly around Silicon Valley. Gross margins were 60 basis points better than a year ago at 17.5%, but we were more impressed by the firm’s ability to keep SG&A expenses in check.
However, order growth wasn’t incredibly strong, increasing just 3% year-over-year. The company did face a tough comparison, but the firm’s backlog remained strong, up 33% year-over-year to $744.7 million. We’ll wait to see how other firms perform, but we think it is possible KB may be lagging the competition, including D.R. Horton (DHI), Toll Brothers (TOL), Pulte (PHM) and Lennar (LEN). Nevertheless, the firm was able to generate $14 million in operating cash flow, allowing it to bolster its balance sheet. KB Home spent $8.3 million to extinguish high-yielding debt.
Though we like housing at the moment, we do not find any of the homebuilding stocks very attractive at this time. KB Home, specifically, trades at the high end of our fair value range, so we’re not looking to add the name to the portfolio of our Best Ideas Newsletter.