KB Home swings to a profit and its turnaround stays on pace

Market Realist

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) or PulteGroup (PHM) than a luxury builder like Toll Brothers (TOL) or NVR (NVR). 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 to the Southwest and mid-Atlantic states.

(Read more: Homebuilders breathe a sigh of relief as mortgage rates fall)

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 Home’s business.

(Read more: Why you should consider the mortgage applications indices)

Highlights of the earnings release

KB Home reported a third-quarter profit of 30 cents a share versus an expected profit of 21 cents a share. In Q112, it reported a gain of 4 cents a share. It expects to be profitable for 2013. Unlike some of the other builders, KB is a turnaround story. Revenues increased 29% to $549 million, and average selling prices (or ASPs) were up 22%. Net orders were up 7% on a dollar basis, while deliveries increased 6%.

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 the hottest. It has been focusing on repositioning into markets that have more demand for larger homes.

On the conference call, CEO Jeffrey Mezger noted that the increase in interest rates is starting to be felt, as some buyers backed out of deals and some buyers are taking longer to make decisions. He made an interesting observation that tight underwriting is hurting demand more than rates. The company intends to focus on coastal California markets, where it can get higher prices. Mezger believes increasing rates are starting to slow home price appreciation.

KB Home believes its strategic focus on 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 more: Bernanke’s comments send mortgage rates screaming higher)

Read-across to other builders

The best comp for KB Home is Lennar, and it reported strong 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.

The takeaway: so far, so good.

More From Market Realist

View Comments