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KB Home reports its 1st profitable 2nd quarter since the recession

Brent Nyitray, CFA, MBA

Rising revenue: Assessing KB Home's Q2 2014 earnings (Part 5 of 6)

(Continued from Part 4)

KB Home is a turnaround story

Like virtually every builder, KB (KBH) struggled with cash burn in the post-bubble years. KB made some strategic decisions to focus on its most profitable metropolitan statistical areas and spend heavily, buying land at rock-bottom prices. Plus, it’s dealing with a lawsuit. As KB executes its turnaround, it will almost inevitably hit some bumps on the road.

The fourth quarter of 2013 was one of these bumps. KBH attributed the drop in orders to a shift in its focus to the more profitable and fast-growing coastal markets. The company also cited some delays in new communities. It appears some of those issues were temporary, as orders increased in every region in the second quarter of 2014.

Earnings per share

Net income increased to $26.6 million on a GAAP basis compared to a loss of $2.9 million the year before. These numbers include some special items. This was the first profitable Q2 for the company since 2007. Last year was the first year of positive net income since 2006.

Costs will rise

Homebuilders have been in an enviable position over the past year. They’ve been able to raise prices pretty much at will. And costs have been increasing at a slower pace. That dynamic is definitely going to change. Labor costs are increasing—especially in the skilled construction trades. Because the housing bust was so long and so deep, many construction workers left the industry to pursue new careers—primarily in the energy sector and trucking.

Second, as home price appreciation begins to cool, builders will have to focus on increasing volume to drive revenue growth. This means increased competition for building materials. And this in turn means lower gross margins as the cost of goods sold increases. This will drag profitability going forward. Yet demand should remain strong. This will be an issue for other builders like D.R Horton (DHI), Lennar (LEN), PulteGroup (PHM), and Toll Brothers (TOL).

Continue to Part 6

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