KB Home's 2Q Results Show Smaller Might Not Be Better
June 26 2009 - 11:31AM
Dow Jones News
KB Home (KBH) has staked its future on size-shaved,
more-affordable homes designed to compete with a swelling supply of
bargain-priced foreclosures. But its results Friday left analysts
questioning if smaller remains better.
The Los Angeles-based builder missed expectations when it
reported a narrower fiscal second-quarter loss - $78.4 million, or
$1.03 a share, compared with a year-earlier loss of $255.9 million,
or $3.30 a share - aided by smaller charges as net orders again
outpaced closings. While down 31% from a year earlier, orders
surged nearly 60% from the first quarter.
"This reflects the success of management's proactive efforts to
redesign its product," noted UBS analyst David Goldberg, who had
forecast a 50% annual drop. "The company's strategy positions it
well to outperform."
Credit Suisse's Dan Oppenheim agreed, pointing out the success
in foreclosure-heavy California, one of the states hardest hit by
the multi-year housing slump.
But J.P. Morgan analyst Michael Rehaut disagreed, pointing out
"the order drop was not only worse than expected, but is also in
sharp contrast to last quarter's 26% year-over-year rise."
That could be one reason shares of the nation's fifth-largest
builder by annual closings had tumbled 9.5% in recent trading,
making it by far the sector's biggest loser.
Debate over the revamped floorplans known as "Open Series"
aside, the results came with cautiously optimistic commentary.
Chief Executive Jeffrey Mezger said although economic indicators
remain mixed, the company is beginning to see signs that "some
negative housing-market trends may be moderating at both the local
and national levels." He added it is premature to say the market
has reached the end of its correction.
Even so, that's a dramatic switch from March, when he saw no
meaningful improvement in market conditions for the rest of this
year.
The change in tone - which follows similar statements from No. 4
Lennar (LEN) Thursday - is a big deal for homebuilders, battered by
the housing bust, which continue to limp through a string of
quarterly losses that as forced them to recreate their business
model. Numerous private builders have folded -- or are in danger of
going out of business.
With the economy still in recovery mode, no one is ready to call
a bottom. Indeed, data released Wednesday from the U.S. Commerce
Department showed new-home sales unexpectedly fell in May.
Americans remain on the sidelines, afraid of elevated
unemployment rates and plunging home values. While smaller homes -
now being constructed by several builders that profited from
supersize inventory during the boom - are helping the sector
compete with foreclosures and short-sales, the inventory continues
to catch buyers' eyes. Such transactions can drag down appraisals,
builders say, forcing them to cut prices or risk losing a deal.
Builders also face the end of tax credits engineered to
stabilize the shaky market. The $100 million California set aside
to tempt buyers of new homes with a credit of up to $10,000 is
nearly depleted, while the federal government is offering qualified
first-time buyers up to $8,000 for deals done before Dec. 1. The
federal money could be extended and/or expanded, but it is unlikely
the financially troubled Golden State's builders will see any more
funds.
For KB Home, "a key question will be the success in CA following
the end of the tax credit for new home buyers," Oppenheim said.
The builder's latest results included $49.5 million in inventory
and joint venture write-downs and charges, while the prior year's
included $176.5 million in similar charges and a $24.6 million
goodwill write-down.
Revenue dropped 40% to $384.5 million as deliveries declined 37%
and the average price fell 4.6%.
Net new orders for the quarter fell 31% to 2,910. The
year-to-year increase was in part due to the cancellation rate
dropping to 20% from 28%. That's down from the 58% reported at the
end of 2007, according to J.P. Morgan.
The company's backlog, in terms of number of homes, fell
39%.
Gross margin, excluding inventory write-downs, rose to 12.7%
from 8.7%.
-Dawn Wotapka, Dow Jones Newswires; 212-416-2193;
dawn.wotapka@dowjones.com
-Kerry Grace contributed to this report.