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Why KB Home's Strong Second Quarter Results Matter

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Why KB Home's Strong Second Quarter Results Matter PART 1 OF 3

KB Home Just Reported Strong Revenue Growth for 2Q16

KB Home’s revenue growth beats estimates

KB Home (KBH) reported 2Q16 and full-year earnings after the market closed on June 22. The company’s revenues and EPS (earnings per share) beat Wall Street estimates, echoing similar results from Lennar (LEN). Investors who want to trade in the entire homebuilding sector can do so via the SPDR S&P Homebuilders ETF (XHB).

KB Home Just Reported Strong Revenue Growth for 2Q16

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For the second quarter of 2016, KB Home reported revenues of $811 million, which easily topped the Wall Street estimate consensus of $750 million. Revenues increased by 30% on a YoY (year-over-year) basis on higher volume and average selling prices.

Order growth

KB Home reported deliveries of 2,329 units, which is 30% higher than the 1,787 units one year ago. Average selling prices increased by 2% to $379,800, and the cancellation rate came in at 21%. The company experienced order growth in all markets, except for in the Southeast.

What to make of the first-time homebuyer?

KB Home CEO Jeffrey Metzger discussed the return of the first-time homebuyer, stating, “We are encouraged by the continued improvement in housing market conditions across the country and by the recent increase in participation from first-time homebuyers, historically our primary customer segment.”

Metzger also stated that “We believe we are particularly well-positioned to leverage our strength in serving the demand from this demographic with dynamic product offerings. With favorable market trends and our financial and operational progress in the first half of the year, we have positive momentum in our business heading into the remainder of 2016.”

Higher home prices

Higher home prices and higher mortgage rates have begun to cause sticker shock for the first-time homebuyer. First-time buyers have traditionally been KB Home’s bread and butter, but the company has made a strategic move to focus more on the move-up buyer. D.R. Horton (DHI) is going in the opposite direction, launching a new brand of affordable starter homes. The latest figures from the National Association of Realtors has the first-time homebuyer accounting for about 30% of all existing home sales.

Meanwhile, credit is beginning to loosen according to the Mortgage Bankers Association’s Mortgage Credit Availability Index. Washington is taking steps to increase access to credit by reducing mortgage insurance for FHA (Federal Housing Administration) loans and bringing back the 3% down Fannie Mae loans. Other builders such as PulteGroup (PHM) and Lennar (LEN) stand to benefit, as well.

Now let’s take a look at KB Home’s 2Q16 earnings.

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