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Why KB Home reports an 8% revenue increase in Q2 2014

Brent Nyitray, CFA, MBA

Rising revenue: Assessing KB Home's Q2 2014 earnings (Part 3 of 6)

(Continued from Part 2)

KB Home revenue growth matches estimates

For the second quarter of 2014, KB reported revenues of $565 million, which was bang in line with Wall Street estimates. 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 a 2% drop in units and an increase of 8% in dollar volume for the quarter. The company experienced order growth in all markets—even the West Coast. This is a good sign for KB going forward. The company 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. First-time buyers are KB’s bread and butter. KB is making a strategic move to focus more on the move-up buyer. But the company still focuses on the low end and 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 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

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