KB Home (KBH) stock fell sharply after it missed Wall Street estimates by a wide margin. Ironically, the KBH news came on the same day we learned that new home sales hit a six-year high.
There was little question that low-but-rising mortgage rates were taking some of the strength out of the housing market. Other recent housing data has been shaky at best. That makes the new home sales numbers especially welcome at this time.
Weakness in the housing market has been weighing on shares of homebuilders almost all year, and KBH stock has been no exception. KBH stock was off more than 7% even before Wednesday’s big selloff on the earnings miss. The two big housing exchange-traded funds — the iShares US Home Construction (ITB) and the Homebuilders SPDR (XHB) — are down 7% and and 9%, respectively.
And now KB Home is only adding weight to a sector already hurt by easing sales of existing homes and declining levels of mortgage applications, among other weak data.
Wednesday’s reading on new home sales were helped by a slight year-over-year decline in mortgage rates, but that didn’t flow through to KB Home or KBH stock.
KBH Hit By Profit and Revenue Misses
For the most recent quarter, KB Home said its fiscal third-quarter earnings rose to $28.4 million, or 28 cents per share, from $27.3 million, or 30 cents, a year ago.
Analysts, however, were looking for earnings to come in at 40 cents a share. Make no mistake, an earnings miss of 12 cents a share is a whopper.
At the same time, the top line also missed Street estimates by a lot. Revenue came in at $589 million vs. analysts’ average forecast for $647 million.
Lower revenue contributions from financing activities and tax expenses were partly to blame for disappointing sales and profit at KBH. After all, total revenue did rise from $549 million in the prior-year period.
In a more helpful sign, KB Home said delays in construction schedules and slow customer mortgage loan closings pushed some deliveries into the fourth quarter. Although deliveries fell to 1,793 homes in the third quarter from 1,825 homes delivered in the year-earlier quarter, deliveries pushed into the fourth quarter should allow KBH to recover some of that lost ground.
KBH Neither a Buy Nor Sell
That said, KBH stock a hold at this point. Yes, it’s amazingly cheap, trading at less than 11 times forward earnings, or more than a 25% discount to the S&P 500, but there’s ample reason for that.
The economy and housing market are recovering at a glacial pace. Housing stocks had a great 2013 based on a healthier housing market, but that improvement was baked into shares some time ago. Even after the latest new homes sales data, the housing market is looking shaky, and even incremental gains are hard to come by.
KBH stock isn’t going to break out of the pack. The entire sector is underperforming this year. Until the catalyst of accelerating growth in housing and the wider economy comes to pass, there’s no reason for any market-beating upside in this name.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
