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KB Home's Order Book Is Soaring

By Asit Sharma – Jan 13, 2021 at 10:35AM

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The home builder is riding a wave of residential demand.

If you only looked at KB Home's (KBH 2.12%) top line this quarter, you might miss an extremely promising narrative. The nationwide home builder reported fourth-quarter 2020 earnings results after markets closed on Tuesday. At first blush, the scorecard leaves much to be desired: Revenue and net income both declined against the prior-year period.

Yet the company is gearing up for several quarters of growth, and this is better appreciated by looking at some key metrics gleaned from the last few months. We'll discuss the quarter and important metrics in detail below as we parse out the main takeaways from the report.

A couple with toddler tours a home with an agent.

Image source: Getty Images.

A booming order book

KB Homes reported a 23% drop in revenue against the fourth quarter of 2019, to $1.19 billion. The company is still recovering from a dip in net orders and a near-standstill in housing starts in the second quarter of 2020, due to the COVID-19 pandemic. I recently discussed this headwind that's trimming home deliveries and recorded sales within the industry in relation to competitor Lennar Corporation's latest earnings

Not surprisingly against this backdrop, the company delivered just 2,876 homes versus 3,929 in the prior-year quarter. But KB Home was able to increase its adjusted housing gross profit margin (which excludes inventory impairments and the amortization of capitalized interest) by 90 basis points to 24%. Adjusted operating income (which also excludes inventory-related charges) remained flat at 10.7%.

KB Home's financing arm improved pre-tax income by $0.2 million to $9.5 million in the fourth quarter. Combined with housing profits, the organization's total net income declined by 13.9% year over year, to $106.1 million. Diluted earnings per share dipped commensurately by 14.5%, to $1.12.

While fourth-quarter results reflected KB Home's continuing rebound from its second-quarter weakness, investors nonetheless pushed shares up by more than 5% in late-afternoon trade on Wednesday. This is due to a burgeoning order book -- the company reported a 42% increase in net new home orders in the fourth quarter. Multiple trends are increasing demand versus supply in the housing industry, including a chronic underbuilding of new houses in the 10 years since the Great Recession, to millennials' delayed starting of families.

Indeed, KB Home reported that its orders now stand at their highest fourth-quarter level since 2005. In addition, the value of its backlog jumped 63% over the fourth quarter of 2019, to $3 billion -- an amount equal to nearly three-quarters of the company's entire 2020 revenue of $4.2 billion. As it works through its backlog over the next several quarters, the residential construction leader should be able to realize handsome pricing power: The company's average selling price per home has increased by 5% over the prior-year quarter, to roughly $414,000.

A promising outlook versus investor skepticism

Management pointed to its behemoth rise in orders and backlog, as well as a plan to increase its year-over-year community count (which currently stands at 263), as qualitative factors that signal extremely strong revenue and earnings potential over the next several quarters. In its earnings press release, management stated that "the Company expects to achieve significant growth in its scale and profits in 2021."

Yet KBH Home refrained from providing specific quantitative guidance either for the upcoming quarter or the new fiscal year, citing remaining uncertainty due to the lingering effects of the pandemic. Management believes that it can't rely on a stable earnings environment "until the COVID-19 pandemic has been resolved as a public health crisis."

Perhaps this gives savvy investors an opportunity, as skepticism regarding a housing recovery in the context of the pandemic, combined with a traditional wariness among investors around the cyclicality of residential construction, has kept something of a lid on home builders' share prices. KB Home, especially, looks attractive for those with a bent toward patience -- as of this writing, its shares are trading at just eight times forward 2021 earnings.

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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