KB’s orders were 19% above last year’s third quarter, but UBS expected a 25% increase and J.P. Morgan projected a 29% increase. The average selling price of these orders increased 3.6%. Orders in the Southwest, Southeast, Central and West regions rose 94%, 13%, 10% and 7%, respectively.
“In part, this likely reflects the impact of weather related delays in Texas [Houston accounted for ~8.5% of 2014 revenues]… ,” wrote UBS’s Susan Maklari. “That said, order growth remained strongest in the Southwest [up 94% in units YOY] while the remaining regions were up in the low double digit to high single digit ranges. Finally, unit backlog rose 36% YOY, and now offers nearly 5.5 months of forward visibility based on our closing estimates.”
KB’s gross margins of 16.2% came in below those projected by JP Morgan and its own guidance.
“The reported gross margin of 16.2% included $3.5 million of impairments and land option contract abandonment charges,” wrote KBW’s Jade Rahmani. “Excluding amortized interest, gross margin excluding charges was 22.0% from 25.3% a year ago. This suggests the impact of amortized interest on reported gross margins remains elevated.”
KB’s home building revenues rose 36% year-over-year compared to UBS’s estimate of 34%. “Unit closings of 2,236 increased 24.7% year over year and 25.1% sequentially,” Rahmani wrote. “This was slightly below our 2,241 [estimate]. This equated to a backlog conversion ratio of 47.2% vs. our 47.4% [we believe a 60% ratio is normal for KBH].”
California continues to be a driver for KB, pulling in 28% of its deliveries and 45% of its revenues.
“In our view, KB Home is well positioned to benefit from a number of factors as the housing recovery unfolds, including its unique focus on offering customization and its significant exposure to California,” Maklari wrote. “That said, leverage remains elevated relative to peers and we expect its exposure to Houston to be a slight drag on near term results. We believe, however, that these factors are already largely reflected in the current valuation.”