Investors Beware: KB Home Is Struggling Mightily

Since homebuilder KB Home (NYSE: KBH  ) reported a wider-than-expected second quarter loss of $68.5 million -- more than double from a year ago -- in late June, shares are down a whopping 20%.

Along with overall industry weakness, home builders are facing tough times ahead after last year's expiration of federal tax credits took hold on the market, which hit KB's order book and revenues this quarter. Let us delve a little deeper into its numbers.

Decoding numbers
KB's total revenues plunged 27% from the year-ago quarter to $271.1 million, and dragged down a lower number of homes delivered in the quarter, which fell by 29%.

The net loss of $68.5 million included $20.6 million of land writedowns and $14.6 million toward a loan loss. However, even after adjusting for these special non-cash charges, the net loss was higher compared with the year-ago quarter. Ouch.

The federal tax credit that boosted sales last year no longer exists to buoy homebuilders. This proved to be a big setback for first-time homebuyers, a segment KB targets heavily. As a result, KB's net orders for the quarter declined by 11%. The cancellation rate as a percentage of gross orders also stood at a high 25% this quarter.

Even more dismal, its backlogs fell by 23% to $501.5 million.

Dubious financials
KB's inventory levels have been on the rise over the last few quarters, but most worrisome is KB's capitalization. The company has a ridiculously high total debt-to-equity ratio of 381.5%, one of the industry's highest. Though the entire arena is under stress, most peers have a relatively better ratio.

Ryland Group's (NYSE: RYL  ) total debt-to-equity stood at 164% last quarter while Meritage Homes' (NYSE: MTH  ) was at 122% last quarter. Pulte Group (NYSE: PHM  ) , for instance, had a total debt-to-equity of 162.3% in the last quarter, while DR Horton (NYSE: DHI  ) had an even better one at 76.8%.

Though KB's next debt maturity after next month is in 2014, continuously declining cash equivalents in the last few quarters make matters look worse. Recently, the company also put market expectations of a better capitalization to rest when it announced it had no plans of issuing equity now.

Moreover, KB also needs cash to continue with its expansion plans. It recently acquired a sizeable plot to build homes in San Antonio. The Los Angeles-based company also plans to launch more homes featuring solar power to increase energy efficiency. All this, however, only sounds good in theory. Until buyers come back into the market and revenues and margins improve, the situation looks more than grim for the entire sector -- especially KB.

The Foolish bottom line
High unemployment, stricter lending norms, and the elimination of the homebuyers' tax credit are keeping buyers at bay. Moreover, the S&P/Case-Shiller Home Price Index revealed a 4% fall from last year in the April home prices for 20 cities. There seems to be a long way to go before positive signs crop up in the housing sector. I'd wait for some visibility in the industry before placing my bet on the stock.

Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Meritage Homes. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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