The shoes and shingles keep falling in the real estate development sector. With new home orders declining as a result of oversupply and pricey mortgages, KB Home (NYSE:KBH) became the latest homebuilder to hose down profit targets.
The company is now looking to earn between $8 and $8.50 a share this year. With KB Home's stock currently below $40, it's awfully tempting to hop on a quality outfit at five time earnings, but think things through before you fall into this value trap.
Last night, KB Home also posted a 43% slide in new home orders. This is material, because once many of these homes are delivered come fiscal 2007, the top and bottom lines will continue to slide.
Last year, KB Home earned a record $9.53 a share. At the time, the company had expected to earn roughly $11.25 this year. As recently as three months ago, analysts still expected KB to grow its fiscal 2006 profits to $10.80 a share. That mark was watered down to a $9.61 average this year and $7.70 come 2007 -- and that was before last night's grim outlook. In other words, expect analysts to spend the next few days taking more machete whacks at those estimates.
Still, from KB to Toll (NYSE:TOL), the industry isn't in denial. The major developers have been warning their shareholders about company shortcomings for months now. As long as the weakening trend continues, it will make it even more dangerous to make valuation assumptions based on current profit multiples. On a book value basis, the industry is quite cheap, with a few of the smaller players like WCI (NYSE:WCI), Levitt (NYSE:LEV), and MDC Holdings (NYSE:MDC) actually trading for less than their shareholder equity. However, a pronounced slump can lead to asset writedowns, so there is risk even in the seemingly dirt cheap.
Eventually there will be a time to climb back in. KB has already seen its share price cut in half, and you will find similar markdowns throughout the rubble. So dig into due diligence now to find attractive players, but keep that hardhat on.
Looking to score a great housing deal thanks to the glut of homes on the market? Do check out our Home Center before you start hitting the open houses.
Longtime Fool contributor Rick Munarriz has been living in the same place since 1999 -- but did refinance twice when borrowing costs got dirt cheap (only to pay off his home earlier this year). He does not own shares in any of the companies mentioned in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. T he Fool has a disclosure policy.
