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KB Home (KBH), the homebuilder, reported its third quarter results on Friday before the open. Investors are enthusiastic, sending shares 16% higher on the day.

Third Quarter Results

KB Home reported third quarter revenues of $424.5 million, up 16% on the year. The company delivered 1,720 homes, up 7% compared to 2011. The average selling price rose 8% to $245,100.

Gross profits rose by 60 basis points to 17.5% while selling, general and administrative expenses fell by 160 basis points, reflecting the positive operating leverage.

Net income came in at $3.3 million, compared to a loss of $9.6 million last year. Earnings per share came in at $0.04, compared to a loss of $0.13 last year. The profit came as a surprise to analysts, who on average expected KB Home to lose $0.15 per share. Profits were favorably impacted by a $16.5 million benefit regarding insurance recovery, and a tax benefit.

Third quarter order intake totaled $493.3 million, up 16% on the year. As a result of the strong order intake, the total order backlog rose 33% on the year to $744.7 million. KB Home has orders to built 3,142 homes.

CEO Jeffrey Mezger commented on the results:

"We are pleased to report a profit for the third quarter. During the quarter, we continued to generate improvement in several key financial and operating metrics. The favorable year-on-year performance in our deliveries; revenues, operating income, net orders and backlog were particularly encouraging as we operated with fewer communities. At the same time, it is clear that the recovery in housing is gaining momentum across the country as inventory levels are declining and home prices are on the rise."

Valuation

KB Home ended its third quarter with $466.5 million in cash, restricted cash and equivalents. The company operates with $1.73 billion in short and long term debt, for a net debt position of $1.26 billion.

For the first nine months, KB Home generated revenues of $981.9 million. The company net lost $66.7 million, or $0.86 per share so far this year. The company might be on track to generate revenues of $1.4-$1.5 billion. The company is likely to lose money for the full year.

The market values the company at $1.2 billion after Friday's jump. This values KB Home at 0.8 times annual revenues. The valuation compares to a revenue multiple of 1.5 times for PulteGroup (PHM), 2.2 times for Lennar Corp (LEN) and 2.0 times for D.R. Horton (DHI).

Currently, KB Home pays a quarterly dividend of $0.03 per share, for an annual dividend yield of 0.7%.

Investment Thesis

Year to date, shares of KB Home have more than doubled. Shares rose from $7 in January to peaks of $13 in March, before falling back to $7 during the early months in summer. In recent weeks, shares have risen to fresh highs of $15.

Over the past five years, shares have almost halved in price, despite this year's rally. Revenues have fallen from $3.0 billion in 2008 to an expected $1.5 billion in 2012. The company lost money in each year, but managed to squeeze out a small profit during the quarter. To be honest, the gain was entirely produced by one time items.

KB Home trades at a significant discount compared to its main competitors on a revenue multiple. Despite the discount, I remain cautious given the inferior profitability of KB Home and the fact that shares have already doubled in recent months.

I remain on the sidelines, as it is too late to jump on the bandwagon for a short-term ride. On the other hand, the shares are no convincing sell, given the discount compared to other homebuilders.

Source: KB Home: Strong Order Intake Sends Shares To New Highs For 2012