Higher costs keep KB Home from benefits of housing recovery

Thu Dec 20, 2012 2:38pm EST

Newly finished development of homes for sale, built by home builder KB Homes, are pictured in Carlsbad, California January 4, 2011. REUTERS/Mike Blake

Newly finished development of homes for sale, built by home builder KB Homes, are pictured in Carlsbad, California January 4, 2011.

Credit: Reuters/Mike Blake

Related Topics

(Reuters) - KB Home (KBH.N) reported a 20 percent rise in quarterly revenue as selling prices rose, but higher costs prevented the fifth-largest U.S. homebuilder from taking full advantage of a recovering housing market.

The company's shares, which have more than doubled in value this year as the U.S. housing recovery regained some footing, fell as much as 7 percent on Thursday.

Home deliveries rose 6 percent to 2,122 in the fourth quarter ended November 30, the company said. In comparison, luxury homebuilder Toll Brothers Inc (TOL.N) reported a 44 percent rise in home deliveries in its latest quarter ended October 31.

"They're just not able to grow their business and we don't expect them to be able to do it going forward," Williams Financial Group analyst David Williams said.

KB Home's homebuilding costs and expenses jumped 18 percent and gross margins shrank in the quarter, dulling the effect of a 14 percent rise in average selling price.

Williams said he is worried that with the company raising selling prices well beyond its competitors, customers will not want to pay as much for similarly styled houses.

KB Home expects to raise prices further in 2013, Chief Executive Jeffrey Mezger said on a post-earnings call.

Another concern is the company's built-to-order process, due to which it loses out on the market for speculative homes. A spec home is one that a builder constructs with the belief that someone will eventually come along and want to buy.

If buyers are ready to move into a home after sitting on the sidelines for four years, they are unlikely to wait six months for it, analyst Williams said.

"They're going to go out and pick up a spec unit that's already on the ground."

Williams is rated five stars by Thomson Reuters StarMine for the accuracy of his earnings estimates on KB Home. StarMine awards five stars to the top 10 percent of analysts.

EGGS IN ONE BASKET

KB Home, known for its green homes, said it was seeing improvement in demand across the country, most notably in California, where foreclosures previously kept recovery at bay.

The U.S. West Coast accounted for more than half of the company's revenue in the fourth quarter.

"You're really counting on California being the real growth driver here and I just don't think you can do that," Williams said.

Orders, a key indicator for builders who do not book revenue until they build and sell a house, rose 4 percent to 1,557 units in the quarter.

KB Home's orders have lagged those of its peers, Credit Suisse analyst Daniel Oppenheim said, noting that they rose just 1 percent this year due to a sharp decline in the number of the company's housing communities.

Oppenheim said orders, on average, grew by 26 percent for competitors in 2012.

KB Home said it had 191 new communities open for sales at the end of the quarter, down 18 percent from a year earlier.

The company builds single-family homes in the United States, primarily targeting first-time and first move-up home buyers.

Net income fell to $7.7 million, or 10 cents per share, from $13.9 million, or 18 cents per share, a year earlier. The year-earlier quarter included financial services and loan guaranty gains of $26.4 million.

Analysts on average expected earnings of 7 cents per share, according to Thomson Reuters I/B/E/S. KB Home's revenue jumped 20 percent to $578.2 million in the fourth quarter, above analysts' s expectations of $567.1 million.

Homebuilding costs rose to $558.8 million in the quarter from $474.9 million a year earlier. Margins fell to 14.2 percent from 14.7 percent a year earlier.

KB Homes shares were down 6.4 percent at $15.59 in afternoon trading on the New York Stock Exchange.

(Additional reporting by Ritika Rai in Bangalore; Editing by Sriraj Kalluvila, Ted Kerr and Saumyadeb Chakrabarty)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.