KB Home (KBH) recently reported its second-quarter results. While the company's top-line declined ~10% y-o-y, it was able to post ~8% y-o-y growth in its diluted EPS due to excellent gross margin and operating margin performance. The company's gross margin for the second quarter was 18.2%, up 100 bps y-o-y. It was helped by a favorable impact from the mix of homes delivered and lower amortization of capitalized interest. The company's SG&A expense as a percentage of sales was up 50 bps versus the last year. However, if we exclude the current quarter severance charge of $6.7 mn, the SG&A expense ratio improved 30 bps versus the last year.

I consider the company's margin performance very impressive given the kind of volume decline it witnessed due to coronavirus. However, most of the investors are focused on net orders to get a sense of future trends. The company's 57% y-o-y net orders decline for the quarter was worse than most of its peers were reporting. The company's stock, as well as other home building stocks, saw some pressure post the company's results. I don't think it is justified as these order trends aren't reflective of the company's or industry's near or medium-term potential. If we look a couple of quarters ahead, orders will return to their normalized levels and we will likely see a significant improvement over the last quarter trends.

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