But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
KB Home is a West Coast–based homebuilder that focuses on the first-time homebuyer
KB Home (KBH) is a Los-Angeles based homebuilder that focuses on first-time, move-up, and active adult homebuyers. Its price point is at the low end of the different homebuilders, and it’s more similar to Lennar (LEN) than a luxury builder like Toll Brothers (TOL). It also has a financial services arm that provides title and insurance services. The majority of its business is in California and Texas, although it has some exposure in the Southwest and the mid-Atlantic states.
KB Home’s land acquisition strategy is through the use of options, primarily, which means there’s no specific performance consideration. If it decides it doesn’t want to buy the property, it simply lets the option expire. It has a preferred lending relationship with Nationstar Mortgage (NSM). The first-time homebuyer accounts for 60% of KB Homes’ business.
Highlights of the earnings release
KB Home reported a second quarter loss of 4 cents a share versus an expected loss of 6 cents a share. In Q112, it reported a loss of 31 cents a share. It expects to be profitable for 2013. Unlike some of the other builders, KB is a turnaround story. Revenues increased 73% to $524 million, and average selling prices (ASPs) were up 25%. Net orders were up 27%, while backlog increased 19%. Deliveries were up 39%.
The huge increase in ASPs came from the fact that KB has a lot of West Coast exposure, and West Coast markets are the most land-constrained and hottest. It has been focusing on repositioning into markets that have more demand for larger homes. It’s still dealing with a water-related problem in Florida, where a subcontractor was negligent. That caused a special charge that quarter that affected the headline EPS number.
When asked on the conference call about the big increase in interest rates, CEO Jeffrey Metzger said that the increase has created a sense of urgency in customers. This is more or less the same observation we saw out of Lennar (LEN) on its second quarter earnings call. He also mentioned the improvement in consumer confidence and said that he considers that to be a more important driver of home sales than interest rates. Pent-up demand due to low household formation is driving the business, and we’re very early in the housing recovery.
KB Home believes that its strategic focus on the first-time and move-up homebuyers is finally beginning to pay off. As of last quarter, the first-time homebuyer accounted for 60% of sales, even with the 25% increase in average selling prices and outsized student loan debt. And even with the increase in interest rates, home affordability is still at extremely attractive levels.
Read-across to the other builders
The best comp for KB Home is Lennar, and it reported blowout earnings this week as well. The other good comp is Ryland (RYL), which focuses on first-time and move-up buyers. KB Home and Lennar have November fiscal years, so this is the end of homebuilder earnings until next month, when everyone on a December 31 fiscal year reports. Takeaway: so far, so good.
© 2013 Market Realist, Inc.