We maintained a Neutral recommendation on
KB Home
(
KBH
) following appraisal of the third quarter 2012 results.
KB Home's adjusted net loss per share of 10 cents in the third
quarter was narrower than the prior-year quarter loss of 13 cents
and the Zacks Consensus Estimate of a loss of 17 cents.
Double-digit rise in revenues, reduced selling, general and
administrative (SG&A) expense ratio, and improved gross
margins led to the narrower loss in the quarter.
Total revenue increased 16% over the year-ago quarter to
$424.5 million driven by higher housing revenues. Total revenue
also beat the Zacks Consensus Estimate of $419 million. Housing
revenue increased 15.7% over the prior-year quarter to $421.6
million driven by increase in homes delivered and average selling
price as the overall housing market recovers. Adjusted
homebuilding gross margin was 19.0% in the third quarter of 2012,
up 180 basis points year over year driven by price increases.
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 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.
In order to combat the significant downturn in the housing
industry, KB Home significantly reduced its overhead, inventory
and community count levels to better align its operations with
diminished housing activity. Now, with the housing market
stabilizing, the company has started rolling out communities in
highly favorable submarkets, primarily in the Central and West
Coast regions, which allows it to sell larger and higher-priced
homes, thus driving the average selling price higher. The average
selling price for KB home has increased for nine consecutive
quarters in the third quarter. Further, it is activating
communities in stabilizing markets, increasing revenues per
community, and strengthening management teams with additional
resources to improve its operating performance while carefully
managing costs.
With the housing market recovery gaining momentum, KB Home
believes its strategic initiatives including overhead reduction,
margin expansion and land investments in higher priced, better
located communities; coupled with the Nationstar deal; and
increasing backlog will help it achieve profitability in the
fourth quarter and beyond.
However, though the housing market is recovering, we believe
that the process is erratic, uneven and not yet broad based.
Overall, there remain many constraints including volatile
macroeconomic conditions, tepid job growth, tight credit
standards and reduced credit availability for residential
consumer mortgage loans. A speedy housing recovery is unlikely
and it will take several quarters for the markets to fully
recover and return to a more historically typical operating
environment. 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 thus believe that the company may take time to achieve
sustainable profitability.
D R HORTON INC (DHI): Free Stock Analysis
Report
KB HOME (KBH): Free Stock Analysis Report
LENNAR CORP -A (LEN): Free Stock Analysis
Report
PULTE GROUP ONC (PHM): Free Stock Analysis
Report
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