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KB Home Constructs Worse-Than-Expected Q3

Posted: Sep 29, 2008 14:11 PM by Glenn Curtis

Tickers in this Article: KBH, HOV, TOL, LEN

If investors have any doubt about how bad things are in the domestic housing market, just check out California-based homebuilder KB Home’s (NYSE:KBH) Q3 results.

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Here’s what I’m seeing, both the good and the bad:

The Skinny On The Quarter
My purpose here isn’t to kick KB while it’s down. In fact, I think it constructs some nice homes in some desirable locations throughout the southern United States. I also think the company has a chance to turn things around. It will just take some time.

With that disclaimer out of the way, KB reported a hefty loss of $144.7 million or $1.87 a share. That compares to the $35.6 million or 46-cents-a-share loss it turned in during Q3 2007. The Street was reportedly looking for a loss of $1.40 a share. (For more on analyst expectations, read Analyst Forecasts Spell Disaster For Some Stocks.)

On the revenue side, things weren’t really any brighter. In the period ended August 31, KB booked $681.6 million in revenue - not too swell given that in Q3 2007 its top line came in at just over $1.5 billion. It's important to note that analysts were, according to Reuters, looking for revenue of $724.6 million.

I see a couple of issues with this miss. First, in order for the investment community to seriously warm to the story again at this point, KB will have to turn in several quarters of meeting or beating expectations. This type of miss is a big turn-off, particularly for some individuals and institutions that might otherwise want to jump in and bottom fish.

It also shows a disconnect between the company/results and the analyst community. Again, we are talking about a pretty big miss here. In order for analysts to really start promoting this company or to disseminate seriously upbeat research, the analysts will have to get a better bead on what’s going on. That will take time - plus effort on the company’s part. It's important that the company communicates what it is seeing.

Selling Prices Slump
Per the earnings release, “The company delivered 2,788 homes at an average selling price of $239,700 in the third quarter of 2008 compared to 5,699 homes at an average selling price of $267,700 in the third quarter of 2007.”

It's not the end of the world; however, that is a hefty 10.5% drop in average selling price year-over-year. It demonstrates that the environment remains very competitive, and to move houses, it’s having to be aggressive on the pricing front.

I’m also concerned about where KB's average selling price is going from here, given the current economic mess and all of the news that has hit the wires in the last few weeks. The bright side is that its average selling price was higher than the $226,600 price it reported in Q2. (To learn more about home sales, read Existing Home Sales and Housing Starts in our Economic Indicators Tutorial.)

The Flip Side
When KB released its earnings September 26, the stock closed at $21.56. That was up 40 cents or 1.89% from the previous day’s close. That caught my eye because this could have been an opportunity for some shareholders to simply sell (possibly book a tax loss) and move on. The fact that the stock inched up after the earnings report suggests that a good number of shareholders could stick by the company a while longer, which would be a good thing.

KB isn’t alone in its struggles. Big-name builders including Toll Brothers (NYSE:TOL), Hovnanian (NYSE:HOV) and Lennar (NYSE:LEN) have all seen better days as evidenced by their latest results.

Bottom Line
Again, my purpose is not to pick on KB, but instead to demonstrate that unfortunately the domestic housing market remains pretty uninspiring. The company has the potential to turn things around. It will take time for the investment community to again seriously warm to the shares – possibly several quarters of meeting or beating expectations.

For further reading, check out Why Housing Market Bubbles Pop.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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