KB Home (KBH -6%) is crumbling today after the company missed on total revenue for Q2 (May). This marks the second consecutive quarter in which the home builder missed on total revenue. The miss may also come as a surprise for investors after peer Lennar (LEN) reported on June 16 that it beat on revenue for Q2 (May). Lastly, KBH also raised the low-end of its FY21 housing revenue guidance.
Diving into Q2 earnings, housing revenue grew to $1.43 bln, again on the low end of its prior guidance range of $1.42-1.50 bln. This was caused by supply shortages and municipal delays, which shifted some home deliveries into Q3 (Aug).
Despite the lackluster housing revenue growth, there were bright spots within the quarter. Notably, profitability per unit grew to $47,000, up sequentially from $41,000. Also, KBH continues to observe that buyers are not reducing their square footage preference to stay in the market and are still selecting homes averaging 2,100 sq ft, which should continue to drive profitability.
Lastly, the desire for home ownership remains strong. Net orders grew 145% yr/yr to 4,300, KBH’s best Q2 since 2007. There remains pent-up demand from millennials and Gen Z’s who are reaching their home-buying years. This demand is coupled with a shortage of supply from limited resell inventory and the underproduction of new homes. KBH cites that this underproduction will take many years to correct.
Looking ahead, despite supply constraints outlined in Q2, KBH remains confident in its ability to achieve full-year deliveries of 14,000-14,500 homes. The company pegs its FY21 housing revenue at $5.9-6.1 bln. Given that 1H21 housing revenue totals $2.58 bln, we expect impressive quarters for 2H21.
Overall, the total revenue miss is causing investors to head home today despite the benefits provided by a strong housing market. After Q1’s revenue miss, the stock still ticked slightly higher. However, a second miss in a row, especially in a rising interest rate environment, may be leaving investors spooked. Investors will want to see improvement in Q3.
On a final note, we also think that a newly hawkish Federal Reserve may be adding to the pain. Investors want to see blowout quarters when we are in the middle of unprecedented housing demand and before demand presumably cools off in the face of higher mortgage rates.