KB Home (NYSE: KBH), the California-based, overnight-neighborhood homebuilder, reported earnings after the market's close yesterday, blowing past the consensus estimate of $1.78 by delivering $2.06 per stub on quarterly revenue in excess of $2 billion.
Investors, if not analysts, seemed to have anticipated the extra good news: The company's stock has shot up in recent days, advancing more than 6% since Monday and even touching a new 52-week high of $72.50 before fading a bit in advance of yesterday's bell. (Not to worry, though. Around midday, the stock is up an additional 8%.)
The recent performance story has been much the same at several of KB's competitors. Pulte Homes (NYSE: PHM), Lennar (NYSE: LEN), and D.R. Horton (NYSE: DHI) have all rallied nicely of late. Indeed, D.R. Horton, the biggest boy on the home-building block, is currently in the process of securing a new 52-week high of its own today.
There's something happening here
So what's the meaning of all this? Didn't Alan Greenspan just recently wring his hands over a real estate bubble, and hasn't the Fed been on a steady diet of rate increases that should, in theory anyway, make mortgages more costly and home-buying, therefore, less attractive?
Well, sure, but it's not as though Greenspan can exactly fine-tune the economy to what he regards as the perfect pitch. Monetary policy is an inexact science at best, and, despite all the Fed's prodding, mortgage rates continue to hover near 30-year lows. Not surprisingly -- and as my colleague Seth Jayson reports over here -- even classic fixer-uppers continue to go for princely sums, at least in some parts of the country.
California
dreaming
California, which is where KB does a significant portion of its business, is certainly one of those parts. But because the company sells primarily to first-time and "move-up" buyers, its homes generally cost less than the Golden State's median price. That figure recently surpassed the half-million-dollar mark, settling in at a fat and unhappy $510,000. The typical California KB crib, meanwhile, will ding you a "mere" $450,000.
The company, moreover, is a regionally diversified operation. It builds homes in 12 states, and, beyond that, sports both a mortgage unit and a successful international subsidiary, as well: The firm's Kaufman & Broad S.A. division is among the leading homebuilders in France. That country, which is experiencing a bit of a real estate boomlet of its own, accounted for 15% of KB's "units delivered" in fiscal 2004.
That international diversification should help insulate KB a bit -- if there really is a U.S. real estate bubble and if it really does burst. The more important point, though, is this: Making investment decisions on the basis of macro-economics is essentially guesswork. Just ask Alan Greenspan, who must be scratching his pate plenty these days.
Rather than going macro, then, Foolish investors should pay attention to a company's fundamentals and, of course, to its valuations.
With that in mind
On the first of those fronts, anyway, KB -- whose peers also include the likes of Toll Brothers (NYSE: TOL) and Centex (NYSE: CTX) -- seems to be doing just fine, thank you very much. Demand is strong and apparently getting stronger. In its earnings announcement, KB reported that net orders rose 15% during the quarter and that its "backlog" (i.e., units ordered, but not yet delivered) increased to the tune of 52%, a figure that reflects nearly $7 billion in future revenue for the firm.
Moreover, with the typical KB home now fetching $247,800 -- a $31,000 increase over last year's same-quarter figure -- the firm's pricing power is on the rise, as is its earnings outlook. KB now expects to deliver $9 per diluted share during fiscal 2005, up from a previous estimate of $7.88.
The price you pay
Still, if the company seems fundamentally sound, there's always the nagging question of just how much to pay for its stock.
A trailing 12-month P/E in the vicinity of 13 is roughly in line with industry peers, but it's considerably higher than the company's five-year historical average. It's also a bit higher than D.R. Horton's and Pulte's, larger companies that stand to benefit just as much as KB from prevailing interest rate winds and the country's seemingly insatiable appetite for new homes.
Beyond that, buoyant times though these may be for homebuilders right now, the industry is inherently and notoriously cyclical -- not to mention fiercely competitive. The sharply increased pricing power that KB and others are currently experiencing could easily fade during tougher times.
The Foolish bottom line
With that as a backdrop -- given the recent run-up in homebuilding stocks in general and of KB in particular -- Foolish investors (especially those of the value-hound persuasion) may want to wait for a discount before settling down with the homebuilders. Things look just a bit too frothy right now.
First-time homeowner Shannon Zimmerman is lead analyst of The Motley Fool's
Champion Funds
newsletter and could use some assistance with a small plumbing problem he has in his basement. Shannon doesn't own any of the securities mentioned above, and the Fool has a strict
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