Downside For KB Homes Not Necessarily Priced In

Blogging Stocks' Elizabeth Harrow notes bearish sentiment on homebuilder KB Homes (KBH) is so high that Friday’s earnings announcement shouldn’t make much of an impact either way:

While the heavy bearish sentiment should translate to limited downside, the potential for upside is similarly slim; resistance from the security's 20-week moving average looms just overhead in the 16 region. In short, it looks like KB Home should hold steady on the charts after earnings, since expectations on the Street are so unanimously low. Barring any major positive developments, look for any post-report moves to be muted.

Harrow notes that even the massive shorts on the stock may just take some money and run, so the stock won’t slide as much even if the company disappoints for the sixth quarter in a row. But what if the company disappoints spectacularly? Homebuilders such as Toll Brothers (TOL), Lennar (LEN) and Hovnanian (HOV) have recently reported dismal numbers. The companies show no signs of a let up in the downturn.

KBH has been laying off and cutting back on a grand scale. The homebuilder is pulling out of the metro Atlanta market, shrinking its footprint in San Antonio. KBH had entered the Atlanta homebuilding market in 2003 with the $141 million purchase of a local homebuilder. Building and home price figures are down and still trending that way. Even the uptick seen in California turns out to be due primarily to speculators. Yale economist Robert Schiller thinks it may even cause a double dip in a housing recovery as those speculators dump houses once they’ve made some profit on them.

KB Homes has been pretty good at spotting market trends since this downturn began. The homebuilder sold off its Kaufman & Broad subsidiary in France at the peak of the European market. It was also among the first companies to start shrinking its corporate size and home sizes.

KB is taking a 'back to basics' approach by focusing on building smaller houses, hoping to tap in to the first home buyer market. Those buyers generally lead the housing market out of the doldrums. The Las Vegas Sun reports that KBH is offering houses in northwest Las Vegas for $75/sf:

Eighteen builders have more than 100 models priced under $100 per square foot, said Larry Murphy, president of SalesTraq, which tracks the Las Vegas housing market. The price per square foot of new homes sold through October was $126.01 — a 30 percent decline from $180.17 in 2007. That’s the lowest since $109.33 per square foot in 2003.

There’s the possibility that Obama’s stimulus package may include an extension of the carryback clause. This would enable homebuilders and banks to get back billions of dollars paid in taxes during the housing boom by offsetting them against losses incurred during the housing slump. Builders have been lobbying-- practically marching on Washington to get that included in whatever stimulus measures are coming.

But it’s not clear that it will help KB Homes in the near term. KBH shares hit $7 in November, which means it’s doubled since then. True that’s down 31% y/o/y, but there could be plenty of downside left.

Comments

[dhkystud:]

I am a builder, or I should probably say "was". Now I'm a lot inventory holder. In any event, I don't think any builder can make much of a margin on selling homes, even if the write there lot off completely. Unfortunately, material prices have not dropped enough to allow a brand new home sell for a price that is competitive to any homes being offered today (which are heavily discounted). Secondly, even if the builder wanted to sell a brand new home at 25 to 30% over the current market (which is probably the spread today), they probably wouldn't get the appraisal to support their price, which is simply based on their cost of materials plus a small profit (or margin to cover overhead). Its going to take several months, and at least 1 year to perhaps 2, for values to rise enough to support new home prices.

Jan 08 09:46 AM

[Guero:]

KBH is probably beat down as far as it will go. They don't have excessive land positions, especially developed lots, and a good cash balance to weather 2009. A significantly smaller footprint in one of the nation's better housing markets in Central TX is not a good sign, however.

Jan 08 11:23 AM

[discov:]

Guero, many of the home builders use some pretty shifty accounting to state their cash position. After taking a look at KBH debt load, as compared to their more realistic cash position. I think there is a lot of downside left.

I have price targets of 0 on several home builders.
Ryan

Jan 09 02:54 AM

[Joe Friday:]

dhk. can you share your insight as a builder as to the realistic decline in lot values in your area, and to the extent that you can, comment on the lot inventory of KB. It seems to me that, for the most part, putting a real value on the lot inventory is the key question in determining the realistic value of the homebuilders.

Jan 09 06:17 PM

[Michael Arold:]

I do not think KBH and other homebuilders will survive 2009. Reason: these companies have a lot of dept due for repay this year.

Jan 10 10:00 AM