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Rising revenue: Assessing KB Home's Q2 2014 earnings

Rising revenue: Assessing KB Home's Q2 2014 earnings (Part 1 of 6)

Consider KB Home’s background before looking at its 2Q14 earnings

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. It’s more similar to Lennar (LEN) or PulteGroup (PHM) than any luxury builder, like Toll Brothers (TOL) or NVR (NVR). It also has a financial services arm that provides title and insurance services.

KB Home Geographic ExpposureEnlarge Graph

KB Home’s geographical advantage

KB Home has exposure to some of the hottest real estate markets in the U.S. The majority of its business is in California and Texas, although it has some exposure to the Southwest and mid-Atlantic states. In those markets, it has the advantage of favorable demographics—especially the fast-growing Hispanic demographic. It also has strong economic fundamentals in those markets. In these MSAs, prices have been rising much faster than in some of the real estate indices like Case-Shiller. KB’s East Coast exposure is in the red-hot Washington, DC, market, Charlotte, and Florida.

One big advantage of this is that KB has very little exposure to the headaches and slow price appreciation in the judicial states like Illinois, New York, New Jersey, and Connecticut. Rising home prices are a recipe for higher average selling prices, which factor into a company’s gross margins and ultimate profitability. All these localities have experienced double-digit permit growth since 2010. So they’re further along in the general real estate recovery.

Land acquisition strategy

KB Home’s land acquisition strategy is through options, primarily. This means there’s no specific performance consideration. If the company 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 Home’s business.

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