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What Happened to KB Home’s Earnings in 2Q16?

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KB Home is a turnaround story

Like virtually every builder, KB Home (KBH) struggled with cash burn in the post-bubble years. The company made some strategic decisions to focus on its most profitable metropolitan statistical areas and to spend heavily, buying land at rock bottom prices. It also had to deal with a lawsuit. So as KB Home executes its turnaround, it will almost inevitably hit some bumps in the road.

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Earnings per share

KB Home’s net income came in at $15.6 million on a GAAP (generally accepted accounting principles) basis, as compared to $9.6 million in 2Q15. Inventory charges depressed the company’s earnings both this quarter and in 2Q15. EPS (earnings per share) came in at 17 cents, topping Wall Street forecasts of 14 cents.

In 2Q15, the company earned 10 cents per share. The company did not repurchase any shares in the second quarter, after repurchasing $85.9 million worth of stock in the first quarter.

KB Home’s SG&A (selling, general, and administrative) expenses fell by 140 basis points YoY (year-over-year) to 11.6% of revenue. KB Home has been improving its SG&A percentage.

Financial services

Financial services generated a pretax profit of $1.5 million, which decreased 52% from the previous year’s figure of $3.2 million. This change was largely due to a decrease in equity income from the mortgage banking joint venture Home Community Mortgage.

Balance sheet

KB Home’s cash and equivalents came in at $275 million at the end of the second quarter. The company’s debt-to-capital ratio was 59%.

Notably, the whole homebuilding sector, which you can trade via the SPDR S&P Homebuilders ETF (XHB), was hit by KB Home’s numbers. We already heard from Lennar Corporation (LEN), which you can read about here in the series Lennar Reports Strong 2Q16. And the 2Q16 numbers for builders like Toll Brothers (TOL) and CalAtlantic Group (CAA) are coming up in a few weeks.

Now let’s look at KB Home’s gross margin in 2Q16.

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