Are Better Days Ahead for This Homebuilder?

Selling prices are rising, but revenues are falling. New orders are piling up, but current deliveries are lagging. It’s a mad jumble of numbers for homebuilder KB Home (NYSE: KBH  ) .

How are things looking for the company now, though?

The numbers
KB Home's revenues slumped 27% despite a 6% rise in average selling prices. A 31% slump in homes delivered pulled the top line down.

But, are buyers gradually getting over the memories of the now-expired federal tax credits and returning to the housing market? The rise in orders for most homebuilders might be an indication to consider. Beazer Homes' (NYSE: BZH  ) net new orders rose by 23.7% while Hovnanian Enterprises (NYSE: HOV  ) saw its net contracts rise by 33% in their respective third quarters. What's impressive is that KB Home’s rise in net orders has come in much higher at 40%, a very positive number for this homebuilder that mostly targets first-time buyers.

Another heartening piece of news (or, shall I say, number) is the 22% rise in backlog units, indicating potentially higher future revenues. This percentage soars even higher than peer Lennar's (NYSE: LEN  ) recently reported 16% rise in third-quarter backlogs.

KB Home's lower revenues, however, resulted in losses of $9.6 million, much wider than the $1.4 million posted a year ago.

Where is KB Home investing?
KB Home opened 33 new communities in the third quarter. It is also working on the plots it had acquired in San Antonio last quarter, and deliveries are expected to flow into these communities next year.

KB Home's built-to-order business model also seems to be working well, clocking in higher sales in all regions. Thus, it is continuously adding communities with customized homes, while also focusing on more energy-efficient homes. The Los Angeles-based company is now rolling out enhanced energy-saving homes that aim at achieving zero electricity bills, following the recent opening of its solar community in California.

Apart from these investments, the company also has paid off debt worth $100 million this quarter. This has helped its total debt-to-equity ratio improve marginally to 367.3%, down from 381.5% in the preceding quarter. The debt load, however, still remains too high for comfort, and is still much higher than bigger players such as D.R. Horton's (NYSE: DHI  ) 72.5% or Pulte Group's (NYSE: PHM  ) 164%. A bigger concern is KB Home's diminishing cash balance, which is now at $477.4 million, down significantly from $919.9 million in the same quarter last year.

The Foolish bottom line
KB Home has been trying to woo investors by maintaining $19 million in annual dividends, which currently yield an astonishing 4.7%. But, what I would really like to see is the revitalized flow of orders getting converted into higher home deliveries -- and higher revenues -- in the near future.

Management is expecting even more orders and a profitable fourth quarter, leaving us with some hope for the company on the horizon. Once revenues and earnings start moving up, it will mean a better cushion for KB Home to service its debt load.

Higher orders and backlogs, lower cancellations, and lower costs -- things slowly seem to be looking better for the company. What do you think?

Stay updated on KB Home news and analysis by clicking here to add it to your stock Watchlist.

Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. 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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