KB Homes: Frozen on the Bridge?

KB Home (NYSE: KBH), one of America’s largest homebuilders, reported Q2 financial results (see earnings call transcript). Predictably the results include massive amounts of red ink. But when you try to look into the future as stock market investors are prone to do you find confusion. Read this quote about pre-sales:

“The Company’s backlog at May 31, 2009 totaled 3,804 homes, representing potential future housing revenues of approximately $796.9 million, compared to a backlog of 6,233 homes representing potential future housing revenues of approximately $1.47 billion at May 31, 2008. Company-wide net orders for new homes in the second quarter were 2,910, down 31% from 4,200 in the second quarter of 2008 but up 59% from 1,827 net orders in the first quarter of 2009. The Company’s cancellation rate based on gross orders improved to 20% in the current quarter, compared to 28% in the first quarter of 2009 and 27% in the second quarter of 2008.”

Essentially they are telling you that the backlog number is no longer the predictable factor that it used to be. The cancellation rate while greatly improved is still terrible. Imagine what Macy’s would look like if 20% of all sales were returned.

What you need to hear from the executive is what they have learned from this current round of difficulty. Will the model stay the same? Sure, they are trying to become more energy efficient, but that is just a feature similar to kitchen finishes.

Loading up on land, managing your trades, building interesting model homes, buying ads in the local paper and waiting for buyers to show up may not be the way of the future. The management team may be frozen on the bridge and are not preparing for that future.

Comments

[notsosmart:]

if one is not secure in ones job dont tie yourself to any debt.house,car,credit card are to be avoided.there may come a time when you can sign on the dotted line but dont do it now.dont let the" noise" of tax credits fool you.so many good people are in trouble by not thinking things through.

Jun 27 11:14 AM

[CM001:]

"Essentially they are telling you that the backlog number is no longer the predictable factor that it used to be"

The way I see is, the backlog numbers improved from 1Q to 2Q. That's all they are saying and I believe your inference here is wrong.

"Imagine what Macy’s would look like if 20% of all sales were returned."

I see the cancellation rate is improving. If you could present how the cancellation rate was in the past and compared it makes sense. If you look other builders the rate is in similar numbers. In fact even the luxury builder like Toll has 20% cancellation rate.

Jun 27 01:19 PM

[rickm:]

Given the current very stringent mortgage underwiting standards that are currently in effect, are are likely to remain in effect for the forseeable future, historically high cancellation rates are likely to stay with national homebuilders for some time to come. Analysts are going to have to factor this into their analysis. it does put additional pressure on homebuilders, but is just a new fact of life in the industry.

Jun 28 03:09 PM

[FLbuilder:]

This is really another example of uneducated bloggers/posters on SeekingAlpha and why you should take everything you read on here with a grain of salt.

This poster has probably spent 0 days in the homebuilding industry. I have spent about 10 years of my life in the industry.

A 20% cancellation is LOWER THAN THE HISTORICAL RATE FOR THE INDUSTRY. Historically, builders have had cancellation rates of anywhere from 20% to 35%. If you are signing up 70,000 buyers a year and 30% cancel, that is not a problem. If you are signing up 10,000 buyers and year and 20% cancel...you actually do have a problem.

Cancellations are such a terrible way to judge the new home industry at this point in time.

Stabilization of prices, volume of new orders, cash flow generation, and a return to profitability are much better measurements.

Ignore this guys article.

Jun 29 11:01 AM

[johngonole:]

I get what you are saying but I don't think underwriting standards in a historic sense are particularly stringent. I know a few people who have gotten loans that I myself would consider pretty risky. Yes they are worlds tougher than say two years ago. But I still see advertisements for 2-3% down loans.


On Jun 28 03:09 PM rickm wrote:

> Given the current very stringent mortgage underwiting standards that
> are currently in effect, are are likely to remain in effect for the
> forseeable future, historically high cancellation rates are likely
> to stay with national homebuilders for some time to come. Analysts
> are going to have to factor this into their analysis. it does put
> additional pressure on homebuilders, but is just a new fact of life
> in the industry.

Jul 04 02:19 AM