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An opportunity? KB Home revenues disappoint as the West Coast cools

Brent Nyitray, CFA, MBA

KB Home's full-year 2013 earnings: Must-know takeaways (Part 3 of 6)

(Continued from Part 2)

KB Home revenue growth disappoints

For the fourth quarter of 2013, KB reported revenues of $619 million, which was well below the Street estimate of $662 million. The reason for the miss was primarily weakness in the West Coast MSAs. The other regions (Southeast, Southwest, and Central) reported higher deliveries.

For the full year, revenues increased 34% to $2.1 billion from $1.56 billion the year before. Backlog (which is a measure of future revenue potential) increased 10%, to $682 million.

Order growth

KB reported flat order growth in units and an increase of 10% in dollar volume for the quarter. This is well below what competitor Lennar (LEN) reported in its same fourth quarter and fiscal year earnings. The company experienced order growth in all markets except for the West Coast, which it attributed to a strategic shift to more coastal markets, as well as sell-outs of existing communities and also some delays in new community openings.

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 buyer.

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 debt 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 stands to benefit.

Continue to Part 4

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