Is KB Homes' Outlook Realistic?

On KB Homes (KBH) recent earnings call, analysts heard a relatively upbeat forecast for 2009. But were they buying it?

From KBH's Q408 conference call:

We recognize that 2009 will likely bring continued deterioration in the average selling price in our markets.

The homebuilder introduced a built-to-order business model that is geared towards attracting even more first-time buyers:

In Q4 of 2008 the percentage of homes we delivered to first-time buyers stood at 66% of our total deliveries. This is almost a mirror image of where we stood just a few years ago when first-time buyers were less then 40% of our business… We are attracting first-time buyers with a product that is price-competitive with resales and foreclosures… In Tuscan, a 1,700 foot home that built for $89,000 now builds for $63,000.

Even after significant impairments, KBH owns a lot of houses and land:

Our inventories totaled $2.1 billion at November 30, 2008. During the fourth quarter we reduced our inventory balance by $316 million or 12% excluding inventory impairments and abandonments and other non-cash items. We also cut our overall lot count by 11% to 40,000 at fiscal year end 2008 from 52,700 lots three months earlier.

We ended the year with a supply of just under four years based on [trailing] 12 month deliveries.

Expecting prices to fall further:

Finished lots are now readily available in every market at attractive terms. We remain patient however as we do not believe lot prices have stabilized yet.

Silver linings? Can rates are down from 51% to 46% (!) and the company has pared down debt and joint venture liabilities. Even the housing market looks brighter:

Some of the hardest hit regions like Las Vegas and Southern California, overall inventory has actually begun shrinking.

But analysts hammered executives on projections for positive cash flow and higher margins, saying they were based upon 2008 variables such as tax refunds and lower land spend relativity:

KBH: While last quarter we communicated a goal of operating cash neutral for 2009 we are now upgrading that goal to being cash positive in 2009.

Q: You’ve got backlog down over 60%, home prices will probably be lower, and you’re shrinking your communities by upwards of 30% so I’m just trying to understand the levers there that you’re are pulling to feel confident in being cash flow positive?

A: We paid off the December debt, the $200 million. We do expect the tax refund here in the first quarter in February so that will offset the debt reduction. Past that what we’re seeing is as we continue to scale our business to the current revenue it reduces the cash consumption for overhead and we’re also lowering our expectation for land spend in 2009... We’ll continue to reduce inventory.

Our margins were up incrementally in the fourth quarter because we’ve been able to lower our cost to build.

Our margins were up not so much [because of] this open series rollout as it was a lot of the efforts we made in 2008 just through lowering our cost and lowering our spec level that finally played out at the end of the year because our directs were down and are part of it.

Hopeful outlook, including the expectation of taking some communities out of mothballs:

We’ve done the heavy lifting on repositioning our balance sheet and creating dry powder and over the last two years. There were times that we were moving product through at a lower price and a lower margin due to our focus on generating cash.

Going forward a lot of the margin will be a direct reflection of where the market is. We expect prices to go down. That’s why we’re pushing to bring in a whole new product line at significantly lower cost to build then even the lower levels that we achieved in the fourth quarter of 2008. So we’re anticipating price going down... I don’t think you’ll see margins down where they were in Q2 or Q3, but we also aren’t ready to tell you where they’ll be until we’ve opened all this product up and see what the market will give us.

[Margins] will [also] improve through the year because our volumes will pick up as we continue to roll out this product and reopen many of the communities we kind of paused on while we were retooling.

Comments

[MrBuzz:]

The regular price of a home must be between $85,000 and $125,000 no more than that. The average working American cannot afford more house than in this price range.

If we keep building these expensive homes. Then people will be forced to just rent. Its basic math. Income is not that good. I work hourly and once was a high paid GM..

Jan 13 10:11 AM

[User 283977:]

KB Homes' seem to think building less expensive houses is the way out of their predicament. However, if I was in the market for a new home, I would l compare their new, cheaper to build homes with the large number of two to three year old homes that were built to higher quality standards and are currently being sold at fire sale prices. Many of these barely used older homes are likely to be less expensive, include many upgrades, and be built to higher standards in better locations.

I don't see any positives for this stock, or other home builders stocks until the existing inventory of available homes is substantially reduced. Add on to that their statement that they currently have a four year inventory of unsold homes aging in a process known as lot rot, and things don't look very good. The stock is approaching its price back in the early 90s. The next thing I expect to happen is for them to cut their dividend.

I agree with the analysts scepticism on KB Homes' outlook. The only question I see is should current stock holders bale out now or chance riding it into the ground?

Jan 13 02:48 PM

[User 337426:]

KB Home does not sacrifice quality in their homes for price, they're just building a bit differently to reduce overall cost. For example, using pre engineered framing reduces labor and material cost and it's a better building practice.

KB will be building some smaller floorplans and at a lower cost, again NOT less quality.

For those who believe they can find a resell home at a greater quality than a new construction home(in a comparable price range), think again!

The four year supply is of KB's LOTS not homes. KB Home is a Built to Order company, they do have some inventory on the ground, yet a fraction of what other 'spec' builders have.




On Jan 13 02:48 PM Bob Lunn wrote:

> KB Homes' seem to think building less expensive houses is the way
> out of their predicament. However, if I was in the market for a new
> home, I would l compare their new, cheaper to build homes with the
> large number of two to three year old homes that were built to higher
> quality standards and are currently being sold at fire sale prices.
> Many of these barely used older homes are likely to be less expensive,
> include many upgrades, and be built to higher standards in better
> locations.
>
> I don't see any positives for this stock, or other home builders
> stocks until the existing inventory of available homes is substantially
> reduced. Add on to that their statement that they currently have
> a four year inventory of unsold homes aging in a process known as
> lot rot, and things don't look very good. The stock is approaching
> its price back in the early 90s. The next thing I expect to happen
> is for them to cut their dividend.
>
> I agree with the analysts scepticism on KB Homes' outlook. The only
> question I see is should current stock holders bale out now or chance
> riding it into the ground?

Jan 14 04:00 PM

[vics:]

KB Home is a company that has repeatedly lied to the SEC and its own shareholders ... www.usdoj.gov/usao/cac...

Anyone that believes anything this company says, does so at their own peril.

Jan 28 12:33 PM

[LemonMeister:]

All KB Home needs to do is to build a quality product. Too bad share price is way more important than their reputation. Apparently they think money is more important than a home that is actually livable. KB is building LEMON's. They ignore all correspondence, the FTC compliance orders, the Better Business Bureau. What arrogance? Bernie Madoff was just as arrogant. The list if indicted KB Executives and associates at Countrywide aka Bank of America Home Loans grows daily. KB's reputation sucks.. long term profits are at stake. Please pass the HomeBuilder Lemon law in your state - thanks to KB Home. A KB Home Sucks!

Oct 16 09:28 PM