We maintain a Neutral rating on
KB Home
(
KBH
) following appraisal of the second quarter 2012 results.
KB Home's adjusted net loss per share of 31 cents in the second
quarter was significantly narrower than the prior-year quarter's
loss of 89 cents and the Zacks Consensus Estimate of a loss of 36
cents. Double-digit rise in revenues and higher net order growth
led to the narrower loss in the quarter. Total revenue increased
11% driven by increase in homes delivered, net orders and average
selling price.
KB Home is a well-known homebuilder in the United States. Its
operational business model KBnxt offers consumers the flexibility
to design their new homes. Apart from the obvious benefit of
offering choice to consumers, the model also helps the company turn
over its inventory more quickly than its peers, thereby supplying
capital for reinvestment. Further, KB Home focuses on providing
homes with energy-efficient features without materially increasing
the price for the customer due to its single business model,
thereby lowering the total cost of home ownership. This gives the
company a competitive advantage.
Management is strategically reallocating resources to invest in
highly favorable submarkets, which allow it to sell larger, higher
priced homes, thereby boosting the average selling price and net
orders. KB Home is also targeting the higher income, first-time and
move-up buyers; all of whom are more inclined toward buying a new
home rather than buying foreclosures. Further, it is activating
communities in stabilizing markets, increasing revenues per
community, and strengthening management teams with additional
resources to improve its operating performance in the next
half.
Management believes that the housing market is slowly
stabilizing with a gradual recovery in the overall economy,
including the increase in employment rates and higher consumer
confidence. Houses are more affordable now, as home prices
stabilize, mortgage loans come with relatively low interest rates
and home rents become more expensive. Thus, KB Home is witnessing
increasing traffic levels due to heightened consumer demand.
Inventory of foreclosed homes and short sale homes is declining,
thus stabilizing prices of new homes. All these bode well for the
company's profitability.
Management believes that the housing recovery combined with the
company's strategic initiatives (like overhead reduction, margin
expansion, and land investments towards higher priced, better
located communities) and the preferred mortgage deal with
Nationstar (announced in March 2012) will help it to achieve
profitability by the fourth quarter of 2012 and also in fiscal
2013. It expects to see year-over-year improvements in deliveries,
gross margin, average selling price, and SG&A ratio, to drive
better operating results in the second half.
However, though the housing market is recovering, we believe
that the process is erratic, uneven and not yet broad based.
Moreover, the company's net order growth rates are lower than that
of its peers like
Lennar Corporation
(
LEN
),
Pulte Group, Inc.
(
PHM
) and
D R Horton, Inc.
(
DHI
). We also believe that the company may take time to achieve
sustainable profitability. Further, integrating a new mortgage
partner, Nationstar has proved challenging for KB Home and the
complete transition from MetLife Home Loans to Nationstar will take
some time.
D R HORTON INC (DHI): Free Stock Analysis
Report
KB HOME (KBH): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis
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PULTE GROUP ONC (PHM): Free Stock Analysis
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