Home Sales Drive KB Home's 4Q - Analyst Blog

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KB Home ( KBH ) reported net income of $13.9 million or 18 cents per share in the fourth quarter of fiscal 2011 as opposed to $17.4 million or 23 cents per share in the year-ago quarter. 

However, excluding inventory impairments and land option contract abandonment charges of $2.3 million (non-cash) and an income tax benefit of $2.5 million, adjusted net income came in at $13.7 million or 18 cents per share, much higher than the Zacks Consensus Estimate of a profit of 3 cents per share.

Total revenue increased 6% year over year to $479.9 million, mainly driven by a 6% rise in housing revenues to $475.7 million. The improvement in housing revenues reflected a 4% growth in the number of homes delivered to 1,995 homes and a 3% rise in average selling price to $238,400.

Net orders surged 38% to 1,494 homes from 1,085 homes a year ago. As a percentage of gross orders, the company's cancellation rate was 34% in the quarter compared with 37% in the prior-year period.

The company's backlog totaled 2,156 homes as of November 30, 2011, up 61% from 1,336 homes as of November 30, 2010. Potential housing revenues from backlog rose 74% to $459.0 million as of November 30, 2011 from $263.8 million as of November 30, 2010, primarily due to higher number of homes in backlog.

The company's homebuilding business (including housing and land) posted an operating income of $0.80 million in the quarter compared with $29.1 million in the fourth quarter of fiscal 2010. The drastic deterioration was attributed to lower gross profit and higher selling, general and administrative (SG&A) expenses.

Selling, general and administrative (SG&A) expenses shot up 36% to $75.6 million from $55.7 million a year ago. Though the company implemented cost-containment initiatives, it was mostly offset by the costs incurred in delivering a higher number of homes, increased marketing expenses to support new community openings and higher legal expenses.

The Financial Services business, which includes KB Home's equity interest in an unconsolidated mortgage banking joint venture, registered a 35% rise in revenues to $4.1 million. The segment reported pre-tax income of $22.8 million in the quarter, including a gain of $19.8 million related to the company's unconsolidated mortgage banking joint venture.

Excluding the gain, adjusted pre-tax income of the segment amounted to $3.0 million compared with $3.6 million in the year-earlier quarter.

The reduction in pre-tax income was credited to lower equity income from the company's unconsolidated joint venture. The decrease in equity income was the result of lower mortgage loan originations and lower profits per loan.

KB Home had cash, cash equivalents and restricted cash of $479.5 million and total debt of $1.58 billion as of November 30, 2011. Inventories slightly rose to $1.73 billion as of November 30, 2011 from $1.70 billion as of November 30, 2010.

Fiscal Year Summary

KB Home realized an adjusted net loss of $90.7 million or $1.18 per share compared with an adjusted loss of $12.9 million or 17 cents per share. However, loss per share in fiscal 2011 was much narrower than the Zacks Consensus Estimate of $2.45 per share.

Total revenue declined 17% to $1.32 billion mainly due to lower housing revenues. Housing revenues dipped 17% to $1.31 billion, driven by a decrease of 21% in home deliveries to 5,812 units, partially offset by a 5% increase in average selling price to $224,600.

Our Take

A depressed housing industry is the biggest concern for any homebuilder including KB Home. Besides, there is no sign of a speedy recovery. Moreover, KB Home's high dependency on certain markets like the Central U.S. (Colorado and Texas) and the West Coast (California) makes it heavily exposed to market fluctuations as compared to other homebuilders like Lennar Corp. ( LEN ) or DR Horton Inc. ( DHI ).

However, KB Home's efforts to improve its business are worth mentioning. To cope with the current housing situation, KB Home has started redesigning and upgrading its existing product lines. Measures include building smaller homes, reducing cycle times, lowering production costs through the adoption of cost minimizing and efficiency maximizing construction techniques.

To this has added a strong balance sheet. KB Home has no significant debt maturities for the next three to four years, implying the availability of liquidity to capitalize on potential growth opportunities.

Keeping these in mind, the shares of KB Home are maintaining a Zacks #3 Rank, which translates into a short-term "Hold" rating.


 
D R HORTON INC ( DHI ): Free Stock Analysis Report
 
KB HOME ( KBH ): Free Stock Analysis Report
 
LENNAR CORP -A ( LEN ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: DHI , KBH , LEN

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