U.S. Markets closed

Must-know update: Why KB Home’s revenue growth topped estimates

Brent Nyitray, CFA, MBA

Assessing KB Home's earnings for the first quarter this year (Part 3 of 6)

(Continued from Part 2)

KB Home revenue growth surprises to the upside

For the first quarter of 2014, KB reported revenues of $450 million, which was above the Street estimate of $435 million. The company is still experiencing the weakness it had seen in the fourth quarter of last year on the West Coast. Deliveries in other regions offset the drop on the West Coast. The open question for the West Coast is whether prices have risen so fast that buyers have sticker shock.

Order growth

KB reported 6% growth in units and an increase of 18% in dollar volume for the quarter. This is an improvement from the fourth quarter. The company experienced order growth in all markets, even the West Coast, which is a good sign for them going forward. They had made a strategic decision to emphasize the faster-growing West Coast market.

What to make of the first-time homebuyer?

Higher home prices and higher mortgage rates have begun to cause sticker shock for the first-time homebuyer, which is KB’s bread and butter. KB is making a strategic move to focus more on the move-up buyer, but it still has a focus on the low-end and the first-time buyers.

The first-time homebuyer has had a rough go of it since the real estate bubble burst. First, they’re struggling with high levels of student loan debts as well as a depressed job market. Second, they’re competing with professional investors for the availability of starter homes. Many institutional investors such as BlackRock and large hedge funds have been buying up swaths of starter homes and renting them out. The inventory reduction has made the remaining homes more competitive. Finally, credit remains tight for non-government or non-conforming loans, and as rates have risen, affordability has declined. This has created pent-up demand that will unleash as the economy improves. KB (KBH) stands to benefit. Other builders like D.R. Horton (DHI), Lennar (LEN), PulteGroup (PHM) and Toll Brothers (TOL) stand to benefit from this as well.

Continue to Part 4

Browse this series on Market Realist: