KB Homes – a mere blush

KB Homes (KBH US) reported this week and missed estimates by a country mile. The street was hoping for sales of $646m and got $589m. Sure, sales were up 7% from last year, but the comp from last year was low. Low comps don’t, however, excuse the drop in operating income, which totaled $33.98m, compared to $36m in the previous year. The market didn’t like this news at all, slamming the share price down 8.31% for the day.

US Residential Construction - Operating Sales

US Residential Construction – Operating Sales

In terms of excuses, there were a few. “Deliveries in the quarter were tempered by delays in construction schedules and customer mortgage loan closings that resulted in some deliveries being deferred to the fourth quarter.” There were problems with labour shortages, utility companies and paperwork. The list goes on. That said, nothing is harder to resist than momentum, and the US housing market appears to be developing some.

Commerce Department figures showed newly built house starts leapt 18% to 504,000 pa (against expectations of 430,000). The median new home price rose 8%. We were underweight on James Hardie (JHX AU) earlier in the year due to weakness in the US homebuilding market but this sector seems to have moved into a stronger phase. A feature of growth in the US housing market this year has been the increase in apartments/multi-residence units as opposed to single family dwellings, something which weighs against KB Homes given its focus on single family dwellings. However, the desire of an average American to own a family home is not likely to disappear; on the contrary, rising consumer confidence and increasing house prices increases agitation for the American dream.

Looking also at QMG’s data, we believe better days are on their way. We see steep improvements in sales (up 28% in August, Chart 1 above) and margins are at 5.37% and improving (see Chart 2 below)

US Residential Construction - Operating Margins

US Residential Construction – Operating Margins

KB Homes have certainly gone long on excuses. But it’s hard to miss a rising tide in the housing market. With a forward P/E of around 12.3, there’s plenty of value left in KB Homes.

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