What KB Home Earnings Will Say About Homebuilders' Prospects

KB Home (NYSE: KBH  ) will release its quarterly report on Tuesday, and investors have been bracing themselves all quarter for a potential reversal of the fundamental strength the homebuilder has shown over much of the past year. What we see in KB Home earnings could have dramatic implications for the entire homebuilder industry, especially as peers Hovnanian (NYSE: HOV  ) and Standard Pacific (NYSE: SPF  ) face many of the same conditions as KB Home.

The big boost in homebuilder stocks during much of 2012 and early 2013 came from a long-awaited rebound in home prices and a rise in buying activity. Yet with would-be home-buyers now facing more expensive financing for their purchases, industry followers have expected sales volumes to decline and for KB Home and its peers to face new challenges in doing business. Let's take an early look at what's been happening with KB Home over the past quarter and what we're likely to see in its report.

Stats on KB Home

Analyst EPS Estimate

$0.21

Change From Year-Ago EPS

425%

Revenue Estimate

$569.3 million

Change From Year-Ago Revenue

34%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can KB Home earnings build a strong foundation this quarter?
Analysts have actually gotten a lot more optimistic about KB Home earnings in recent months, boosting their August-quarter estimates by $0.08 per share and adding 60% to their full-year fiscal 2013 projections. The stock, though, has gone in the opposite direction, falling 17% since mid-June.

The big cause of the drop in KB Home shares came in late June, when the Federal Reserve started discussing plans for how it would reduce the level of its bond purchases under quantitative easing. QE has done a lot to keep mortgage rates down, and so fears of its potential end sent those rates soaring, increasing monthly payments for new home-buyers. In the second quarter, home affordability dropped to its worst levels since late 2008, pressuring KB Home and its peers.

In particular, certain cities in the California market, including Los Angeles, San Francisco, and San Jose, are among those most vulnerable to a shift to renting rather than buying. KB Home and Standard Pacific are both based in California, leaving them particularly exposed to any adverse trend there. Yet Hovnanian and several other national homebuilders also have a substantial presence in the California market.

Still, fears about a slide in home sales haven't yet appeared in KB Home's results. Back in June, the company reported a 25% jump in KB Home's average selling price and a 39% jump in home deliveries. Similar strength from rival Lennar (NYSE: LEN  ) confirmed the trend, as Lennar saw a 36% jump in deliveries as well. Perhaps more importantly, KB Home saw its backlog grow 6%, and while that's not as quick a gain as homebuilders saw in the past, it nevertheless points to demand from would-be homeowners to buy.

In the KB Home earnings report, watch the numbers to see how higher rates have affected sales. But also, go beyond those numbers to look for guidance on how KB Home's recent land purchases are defining its strategic vision for the future. Being smart about growth could save KB Home from the punishment it took following the housing bubble of the mid-2000s.

These stocks could last longer than your home
Every good investor wants to build that perfect portfolio that they can set and forget forever. Fortunately, it's easier than anyone ever knew. We've uncovered the pillars of such a portfolio today and we're willing to share The Motley Fool's 3 Stocks to Own Forever. Simply stated, we think they're the best stocks for true long-term investors to know about, and you can uncover them for free today, instantly; just click here now.

Click here to add KB Home to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2648280, ~/Articles/ArticleHandler.aspx, 10/25/2014 11:11:13 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement