KB Home Is Plagued By Systemic Challenges It's no surprise that KB Home reported systemic headwinds were impairing its results. A report from Lennar only a few days earlier says the same thing...

KB Home Is Another Brick In The Wall Of Worry

It's no surprise that KB Home (NYSE: KBH) reported systemic headwinds were impairing its results. A report from Lennar only a few days earlier says the same thing, as do reports from a slew of other S&P 500 companies. While the long-term outlook remains very bright, the near-term outlook has become darker than ever and we think this is setting the market up for a big decline. In regards to KB Home, the price action appears to be bullish but we're not ready to buy in just yet. It's still early in the reporting cycle, and there's a whole host of economic data due out over the next couple of weeks so we are expecting some volatility if nothing else. In our opinion, volatility is usually accompanied by opportunity.

A Strong Quarter For KB Home Could Have Been Stronger

KB Home had a good quarter if one that failed to meet the consensus estimate. The company reported $1.47 billion in consolidated revenue which is good for a gain of 47.1% over last year's pandemically impaired quarter. The revenue was also up versus 2019, which is better news but missed the Marketbeat.com consensus estimate by 575 basis points. This is bad because backlogs continue to grow, indicating an ample supply of business. In that light, KB Home should be outperforming the consensus estimates not missing them. Regardless, the gain in revenue is driven by a 35% increase in home deliveries coupled with an 11% increase in sales price. Notably, deliveries and sale prices are trending higher and we would normally expect both to accelerate in the coming quarter but there are, however, systemic headwinds that have to be overcome.

"While our third-quarter deliveries were impacted by the ongoing industry-wide supply chain issues and labor shortages that have extended build times, we are working through solutions to mitigate the issues and stabilize our construction times," said Jeffrey Mezger, Chairman, President, and Chief Executive Officer.

Moving down to the income portion of the statement the news gets a little better. The company was able to widen its margins at both the gross and operating levels over the last year. Gross margins are up 160 basis points while the operating income margin expanded 270 basis points. These gains helped offset the revenue weakness but the GAAP earnings of $1.60 still missed the consensus by a penny. The GAAP earnings are, notably, up 93% versus last year aided by substantial share repurchases over the past year. KB Home repurchased 4.7 million shares or 5.1% of shares outstanding during the quarter.

No Guidance From KB Home, But The Outlook Is Bright

KB Home did not give any guidance for the coming quarter or the year but it did provide some positive data that points to strong results. The net order value increased by 22% over the past quarter to help drive an 89% increase in the backlog. The company's backlog is close to $4.5 billion or roughly a full year's worth of work at current output and pricing levels. The company is also investing in its growth by buying land and holding inventory. The balance sheet remains strong, cash is down but land holdings are up 83% and inventory is up 19%.

The Technical Outlook: KB Home May Be At A Bottom

Shares of KB Home may be at the bottom but we'd like to see a little more follow-through before getting really bullish on the stock. Price action is up 3.0% in early trading following the report and above the short-term moving average but there is still quite a bit of training to do before the candle is confirmed. If price action closes above the short-term moving average we would get more bullish on the stock with the expectation that resistance at the $44 level will be reached fairly soon. If price action can get above the $44 level we'd be even more bullish on the stock with an expectation for price action to rise to the $48 level.